Bank of Canada Rate Cut Is Possible in Early 2026 After Wednesday's 25bps Reduction, Says BMO

11:58 AM EDT, 10/29/2025 (MT Newswires) -- The Bank of Canada cut its overnight lending rate by 25bps, to 2.25% on Wednesday, as widely expected, with an eye on still-elevated uncertainty and downside risk stemming from the United States tariff situation, said Bank of Montreal (BMO).

The tone of the statement reads as such, but the BoC acknowledges quite clearly that this might be it for rate cuts, for now, noted the bank

The BoC wrote that, "if inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment."

In recent weeks, BMO has noted items on both the dovish and hawkish sides of the ledger, and the former have proven to be larger and more upfront, promoting this rate reduction.

On the outlook, the Monetary Policy Report has returned to a base-case economic outlook rather than a set of scenarios. Real gross domestic prodcut growth is pegged at 0.5% for Q3, revised down slightly from 1.0% in the prior edition. Growth is then expected to pick up to 1.0% in Q4, leaving full-year 2025 at 1.2% and 2026 at 1.1%. In general, this run of below-potential growth is consistent with -- if not a touch softer than -- the bank's near-term outlook.

Inflation remains somewhat "stubborn," but the view that underlying trends are around 2.5% -- and not clearly deteriorating -- offered the flexibility to ease, added BMO. The BoC sees headline inflation at 2.0% in Q4 and the core inflation (median/trim average) at 2.9%. Core inflation settles to 2.3% year over year by Q4 2026.

That's likely it, for now, for BoC easing. Canada's central bank appears to believe that the easing to date will offer support; inflation is steadily on its way back to 2%; and the usefulness of monetary policy is somewhat limited in this unique economic environment.

That said, BMO believes that ongoing softness in the job market leaves the door open for some further support, and another 25bps rate is still on the table for early-2026.

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