Another Bank of Canada Rate Cut in October Is The "Right Way to Go", Says TD

07:26 AM EDT, 09/22/2025 (MT Newswires) -- Last week was a busy one with updates on inflation and retail sales, along with rate cuts from the Bank of Canada and the U.S. Federal Reserve, said TD.

For Canada, this left the 10-year bond yield basically unchanged from the start of the week, and the TSX hovering near its record high. For all the ructions in the markets, the economic details showcase why TD maintains its view that the Bank of Canada was right to cut at last Wednesday's meeting, and that another cut in October is the "right way to go."

The story starts with inflation, noted the bank. Eliminating the consumer carbon tax has dragged down top-line inflation since April, so all eyes have been laser-focused on core measures. From that lens, things sure seem "ugly," with the BoC's preferred measures still reading around 3.0% year-on-year and the old exclusion measures consumer price index excluding food and energy and CPIX at 2.4% and 2.6% year-over-year, respectively.

But these measures mask what's been going on in recent months, instead reflecting the spring's run-up in prices. On a three-month basis, inflation across all core measures has slowed precipitously in the past two months. In addition, the breadth of inflation has sunk with it. The share of CPI categories rising at more than 3% (annualized) over the past three months has fallen to roughly 38%, sharply lower from the 58% share registered in the spring.

Previously strong prints in core goods prices have faded and it's now running at 1.2% (three-month annualized), and services prices too have cooled to 1.5% (three-month annualized). TD expects soft momentum in these key categories to continue as domestic demand struggles to gain traction in the wake of the trade shock.

Last Friday's retail data for July bolstered that view. Although the data remain volatile, growth is petering out, and the bank now estimates nominal retail spending in Q3 to register a below-trend 1.6% annualized gain.

Weaker business prospects are expected to push the unemployment rate higher heading into 2026, with restrained population growth limiting the degree of weakness in the labor market, added the bank. The soft demand backdrop, coupled with the federal government's removal of most retaliatory tariffs, is tempering concerns about a possible resurgence of inflation in the back half of 2025.

The wildcard in all of this is what is to come from the federal government's budget, according to TD. The budget will be released on Nov. 4, but details are missing. Five projects have been called out for the Projects of National Significance list, along with planned spending on Build Canada Homes, tariff mitigation measures for affected industries and re-skilling for affected workers.

In the coming weeks, the bank will be keenly watching for any news on the structure of proposed savings measures and for signs on the timing of planned -- but not yet announced -- investment outlays. The scale and timing of the cuts and investments could materially affect the trajectory of the economy and the BoC's calculus on where the policy rate should be heading into 2026.

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