Bank of Canada May Need to Lean More Dovish in Months Ahead, Says Picton Mahoney Portfolio Manager

10:34 AM EDT, 09/17/2025 (MT Newswires) -- The Bank of Canada lowered its overnight rate by 25 basis points to 2.50% on Wednesday, right in line with market expectations, said Geoff Phipps, portfolio manager and trading strategist at Picton Mahoney Asset Management.

However, just a few weeks ago, in late August, markets were priced for only a 50% chance of a September cut. As to what had changed, Phipps lists the following:

-- Q2 GDP Disappointed: On Aug. 29, StatsCan dropped a tough number: Q2 real GDP shrank by 0.4% quarter-over-quarter (-1.6% annualized), well below the -0.7% forecast. Q1 got a downward revision too, and year-over-year growth through June 30 limped in at +0.90%.

-- Jobs Report Raised Alarms: The Sept. 5 Labour Force Survey (LFS) showed 66,000 jobs lost in August, pushing unemployment to 7.1% -- the highest since 2016, outside the pandemic. Worse, the weakness spread beyond trade-heavy sectors to a broad range of industries.

-- Inflation Stayed Tame: August CPI numbers were calm, with headline prices dipping 0.06% month-over-month and the annual year over year tracking at 1.85%, just under the BoC's 2% target. Prices across tariff-hit categories that spiked earlier in 2025 cooled off, and core goods inflation (three-month annualized) is now tracking at around 0.70%. Given that most retaliatory tariffs have been shelved, import prices likely have some near-term headwinds.

-- Behind the Curve? The BoC's multi-meeting pause on cuts after the March meeting feels a bit out of step now. Markets are pricing a terminal rate of about 2.20% by Spring 2026, which might be too optimistic given the trajectory of data. Looking back, the 2001 (pre-ZIRP) mild recession saw rates drop to 2%, while the terminal rate through the deeper 2008-2009 and 2020 recessions hit 0.25%. Even the minor 2014-2015 oil-related recession saw the overnight rate at 0.50% from 1.00%. The Canadian economy is likely more rate-sensitive now as compared with past recessionary periods, given the rise in household debt-to-income.

The BoC's lack of forward guidance and removal of a dovish statement from the July meeting increases the risk of a not dovish enough BoC, added Phipps. If the economy keeps softening -- and that's looking more like the base case -- the BoC may need to lean more dovish in the months ahead.

It's likely that markets will reprice a slightly lower terminal BoC rate, but not a recessionary one -- yet, according to the portfolio manager.

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