ING Sees 25bps BoC Rate Cut as Weak Outlook Outweighs Strong Data

08:17 AM EDT, 10/23/2025 (MT Newswires) -- October has delivered broadly hawkish hard data for the Bank of Canada, said ING.

The September jobs report (LFS) showed solid 60,000 employment gains while unemployment held stable at 7.1%. Earlier this week, headline inflation for September rose faster than consensus to 2.4% year over year, with both core measures -- median and trim -- also accelerating by 0.1-0.2% above 3.0%.

Yet, markets are pricing in 21bps of easing for next Wednesday's Bank of Canada policy meeting. ING is aligned with the consensus majority in expecting a 25bps cut to 2.25% next week. The rationale lies -- once again -- in the bleak Canadian economic outlook.

The BoC's quarterly Business Outlook Survey (BOS), published Monday, is a key input into policy decisions. The Q3 release showed that while sentiment marginally improved relative to Q2, uncertainty around trade policy continues to weigh heavily on investment and hiring plans.

The "future sales" indicator dropped back into negative territory -- with more companies reporting expected sales decreases -- for the first time in 2025. The percentage of respondents reporting that indicators of future sales have deteriorated is the highest since the pandemic.

Labor market weakness remains the most sensitive and potentially actionable data for the BoC, stated the bank. Despite stable unemployment in September and slight improvements in hiring intentions, 63% of firms expect either unchanged (50%, down from 57% in the second quarter) or reduced (13%, up from 10% in the second quarter) workforce levels. Excluding the pandemic period, similar responses have historically coincided with higher unemployment rates -- peaking at 7.3% in 2015 and 7.9% in 2003.

The BoC survey also pointed to limited inflationary risks, with many firms stating that weaker demand is limiting their ability to pass higher costs through to their selling prices. .

Combined with similar disinflationary trends in shelter costs as seen in the United States, the BoC's baseline projection for CPI to average 2% in 2026-27 still appears realistic. As new economic forecasts are released at this October meeting, the bank expects the Governing Council to look through the September inflation uptick and proceed with a rate cut.

The BoC's own communication is another factor contributing to ING's call for an October cut. Governor Tiff Macklem's speech last Friday -- delivered after the jobs data but before the inflation release -- downplayed employment gains and highlighted "very soft hiring" across the economy, particularly in tariff-impacted sectors.

The statement accompanying the September rate cut also emphasised risks to growth and the labor market, added ING. In particular, it referred to uncertainty about USMCA renegotiations as a major risk. Despite an amicable meeting between Canadian Prime Minister Mark Carney and U.S. President Donald Trump earlier in October, there has been no tangible progress on trade relations, and the risk of tumultuous USMCA talks ahead is likely to weigh on the economic outlook.

While the October statement and guidance may lean slightly more hawkish than September's, we believe it will be difficult for the BoC to signal the end of the easing cycle. Tariff-related risks remain elevated, and allowing markets to price in further dovishness could help loosen financial conditions and weaken the Canadian dollar -- a positive for exports.

ING expects a hold in December, followed by one final cut of 25bps in February, bringing the policy rate to 2.0%. This might look excessively loose, especially relative to the Federal Reserve, but it actually aligns with historical BoC real policy rates, which have often been negative, according to the bank.

The last time unemployment was at 7.1%, the real policy rate (both versus core and headline CPI) reached a negative 1.50%, versus the current +0.35% (versus headline) and -0.45% (versus core). Assuming no major uptrends in inflation from here, further easing wouldn't be an aberration, noted ING.

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