BMO Still Sees Bank of Canada Cutting Twice by March 2026 After Wednesday's 25bps Reduction

11:40 AM EDT, 09/17/2025 (MT Newswires) -- The Bank of Canada cut its key overnight lending rate 25 bps on Wednesday to 2.50%, the first cut in six months and in line with widespread expectations, said Bank of Montreal (BMO).

The explanation for the shift in the BoC's view since the prior meeting in July was straightforward and is very much in tune with the bank's logic on Wednesday's decision. Specifically, three changes in the economic landscape were cited:

-- 1) The labor market has softened further. Since the July meeting, Canada's economy has promptly shed 106,000 jobs (per the Labour Force Survey, or LFS), and the unemployment rate has climbed two ticks, while wage growth has eased.

-- 2) Upward pressure on underlying inflation has diminished. This is perhaps the most important revelation in Wednesday's discussion, with the BoC viewing the two latest consumer price index releases as less threatening. One example: the three-month annualized trend in median CPI has gone from 3.4% to 2.6% since the July meeting (and from 3.2% to 2.4% for trim).

-- 3) The removal of most retaliatory tariffs takes further heat off core CPI. This step was at the start of this month, so it will begin to affect upcoming CPI results -- BMO estimates this could clip inflation by 0.1-to-0.2 ppt.

More broadly, the BoC also noted that global growth seems to be softening more recently, pointing to signs of cooling in China and Europe. For Canada, the central bank saw the weak Q2 GDP result "as expected," and even played up the strength in household spending. The latter could cool, given slowing population growth and a weaker job market.

Looking ahead, the BoC continues to highlight risks and uncertainties, noting it intends to "look over a shorter horizon than usual" and proceed "carefully." The evolution of trade/tariffs and how that impacts the economy, inflation and inflation expectations are key, added BMO.

Notably, the policy statement doesn't mention the potential for further easing unlike in July, suggesting it isn't keen to provide a follow-up cut in October. Still, policy will evolve with the data, and further economic weakness and slowing inflation will likely eventually prompt further cuts, pointed out the bank.

Wednesday's rate cut better balances the risks to the economy and inflation, accoridng to BMO. The BoC left its options wide open on the next meeting, maintaining a focus on a shorter-term horizon than usual to determine the path for policy.

For now, the bank will stick to its call that the BoC will cut two more times in the coming months, although moving every other meeting -- in other words, cuts in December and next March.

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