Bank of Canada's Expected 25bps Rate Cut This Week Makes Sense, Says Desjardins

11:53 AM EDT, 10/27/2025 (MT Newswires) -- Even after seeing a much hotter-than-expected inflation print, market participants are still betting that the Bank of Canada will reduce rates by another 25 basis points on Wednesday, said Desjardins.

"That makes sense," wrote the bank in a note to clients. A careful review of the latest consumer price index data left Desjardins "sanguine" about the outlook for low and stable consumer price growth in Canada.

The bank continues to see the BoC eventually taking its policy rate down to 2.00%from today's 2.50% to support the struggling economy, with a balanced risk assessment about whether rates settle a little higher or a little lower than that point estimate.

Assuming the BoC cuts its policy rate by another 25bps to 2.25% on Wednesday, the focus will shift to the central bank's communications, stated Desjardins. Market pricing seems well-positioned for a range of outcomes this week.

With traders only pricing in an additional 15bps-17bps of easing over and above a quarter-point cut this week, the market might not sell off too much if central bankers sound hawkish about the prospects of further monetary easing, pointed out the bank. With so much uncertainty, it would be difficult for monetary policymakers to credibly rule out more cuts.

However, if policymakers leave the door open to further rate reductions, the market might not rally very much with the federal budget looming less than a week later.

Despite all of the uncertainty, the bank's longstanding view that the BoC will ultimately need to reduce its policy rate down to 2.00% remains intact. While fiscal policy will eventually provide a strong tailwind to growth, most of those dollars won't hit the economy until the middle of 2026.

Back in 2023, when Desjardins predicted that rates would fall to 3.25% by the end of 2024 and to 2.25% by the end of 2025, the bank was convinced that the market was mispriced. The BoC had just raised its policy rate to 5.00% and traders were bracing for more hikes.

Desjardins thought that the economy faced severe cyclical and structural headwinds. Population growth was very likely to slow, mortgage renewals were looming over the housing market and the malaise in productivity showed no signs of abating. Since then, United States tariffs have driven Desjardins to lower that terminal rate forecast by another 25bps to its current projection of 2.00%.

Two years and 250bps later, however, it's becoming clear that the job of monetary policy is nearly done, added the bank. As fiscal policy takes over, it will eventually become evident that the case for monetary stimulus is less convincing.

Fiscal policy and structural reforms are likely to lead the way in 2026. For the next few months, though, monetary policy is still the only game in town and central bankers will need to do a little more before passing the baton, according to Desjardins.

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