CANADA ECONOMICS FEATURE: CIBC's Avery Shenfeld On the BOC Keeping Its Interest Rate Medicine On the Shelf

03:01 PM EDT, 10/31/2025 (MT Newswires) -- "Sometimes," wrote CIBC's Avery Shenfeld, in his regular 'The Week Ahead' column, "there's nothing more the doctor can do for you", in noting that was "essentially the message" from the Bank of Canada this past week, when it "delivered a much needed dose of interest rate relief, but suggested that its medicine chest might be bare in terms of any additional monetary easing unless the upcoming news is even more dire than its forecast."

According to Shenfeld, that was in line with CIBC's prior projection, dating back to this time last year, that had the overnight rate settling at a trough of 2.25%. And, he said, it still seems to be the most likely outcome given the latest statement. But, he also asked, has the Bank really run out of options, and does the patient really need to hear that just yet?

"From our perspective," Shenfeld writes, "there would have been merit in the Bank staying silent on the issue of further interest rate relief. If you're not too sure where the economy is going, or even where the neutral rate lies, you can't really have much conviction on where policy is headed.

"That was what Fed Chair Powell pointed out, on the grounds that the U.S. government shutdown left the central bank in the dark about economic conditions. In contrast, Governor Macklem's team chose to opine that the current level of interest rates was now "at about the right level", even while saying that the economic outlook had heightened uncertainty. Markets reacted by sending term yields higher, at in opportune time, and the Bank has sometimes been too beholden to its prior guidance.

"By setting a low bar in its forecast for 2026 economic growth, the Bank set a high bar in terms of the GDP surprise they would have to see to offer up any additional cuts. There's still a door open if inflation surprises on the downside, but one or two months of CPI reports aren't likely to sway the BoC. With a loaded buffet of underlying inflation measures to pick from, the Bank can always find one that doesn't look quite right. So if further cuts end up coming, it won't be soon, when we might really need them.

"The real question is whether the Bank should be open to cutting interest rates further in the near term. Even its own forecast could be used to justify such a step, because only part of its projection for sluggish growth in 2026 is due to a structural reduction in the economy's potential. It seems to be telling Canadians that we'll have to live with a long wait to get back to that potential, and that it can't try to speed up the healing without risking an inflation upswing.

"That inflation fear looks overdone. Yes, the economy's productive capacity has been cut, but nearly all of that is in export sectors, rather than in the goods and services that feed into the CPI. Nearly all of the upside risk the Bank sees is attributable to cost increases from trade disruptions, which it admits are "difficult to predict." The costs of imports from the U.S. will have risen as American manufacturers are squeezed by tariffs on their inputs. But overseas, US tariffs are slowing growth and building excess capacity. That should put downward price pressure on Canadian imports from Europe and Asia. Moreover, the Bank itself cites slowing wage gains and weak job prospects that will cut into Canadians' purchasing power, and thereby restrain business' ability to charge more.

"Even if the path to sustained 2% inflation has some risks, there's a more activist approach to monetary policy that should be given due consideration, although we doubt it will. Suppose we accept that a 2.25% overnight rate would be "about right" in terms of the annual average for 2026. The Bank could cut rates in upcoming quarter to below 2%, give a helpful push to housing and interest sensitive demand, and take less time to

get to where the Bank wants economic activity to be. If we close the output gap earlier, it could then hike rates later in 2026 in anticipation of fiscal stimulus showing up more in 2027.

"Monetary policy wouldn't be rock steady under that approach, but stability in interest rates isn't a policy objective. Stable 2% inflation, and as byproduct, an economy running close to its potential, is what we're looking for. Instead, after doing the right thing in easing rates materially over 2024-25, the Bank of Canada seems likely to keep its interest rate medicine on the shelf, and have us live through the pain for longer than might be necessary."

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