TD Awaits Tuesday's Canadian Budget to Meet The Economy's Challenges

10:08 AM EST, 11/03/2025 (MT Newswires) -- As was widely expected, the Bank of Canada delivered another quarter-point interest rate cut last week, said TD.

However, yields backed up on the news as the accompanying statement showed that the BoC is comfortable with where the policy rate now stands -- shrinking the odds of further rate cuts, noted the bank.

The decision comes ahead of a much-anticipated federal Budget this Tuesday, where Prime Minister Mark Carney is looking to address the structural challenges facing the country. As Governor Tiff Macklem has pointed out before, the BoC's single blunt policy instrument, changing the overnight rate, can't address the structural damage caused by the trade conflict with the United States.

Fiscal policy is better suited for this task, and so the bank looks forward to seeing the strategy and implementation plan in the budget, which could have a "material" effect on medium-term growth.

The headline of the week was the BoC signaling it was now time for a pause on interest rate moves. The policy rate is now at the lower end of the BoC's neutral rate range -- the rate at which interest rates are neither stimulating nor restricting the economy. The bank's view remains that, given the current balance of risks, a pause here is warranted.

On the downside, August's industrial gross domestic product data showed the economy shrank 0.3% month-on-month, completely offsetting July's gain. A small 0.1% month-over-month increase is expected in September, but, bigger picture, this all reflects an economy facing down a structural change as trade with the U.S. is upended. Industries highly reliant on access to the U.S. market are losing momentum, opening a wedge with domestic oriented sectors.

In addition, with trade uncertainty expected to persist, the outlook here remains fraught, according to TD.

The labor market also remains soft. Last month's jump in employment was a welcome development, but did little to arrest the steady erosion in the labor market. The unemployment rate is still elevated at 7.1% and being restrained by stall-speed population growth. The only silver lining here is that due to the slower growth in the labor force, the economy doesn't need to generate as many jobs as in the past to prevent the unemployment rate from rising -- a fact highlighted in the Monetary Policy Report that accompanied the rate announcement.

At the BoC press conference, Governor Tiff Macklem highlighted that "structural damage caused by tariffs is reducing the productive capacity and adding costs," limiting "the ability of monetary policy to boost demand while maintaining low inflation." As such, the outlook for stable inflation despite weak growth.

However, this brings to the upside to the outlook. The hope is that the new government's first budget on Tuesday will confront the challenges the economy is facing, sai TD. Among the objectives is diversifying Canada's trade relationships to double non-U.S. exports in the next decade.

To accomplish this, large, near-term investments in trade-facilitating infrastructure are expected, on top of a substantial commitment to lift defense spending to 5% of GDP by 2035. The timing and scale of the outlays could provide a lift to growth in the medium term as funds start to flow, noted the bank.

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