By Michael O’Neill

The Bank of Canada has been loitering on the sidelines for most of 2025, convinced that doing nothing was the safest policy. So far, that’s been the right call.

The trade wallop Canada was supposed to take this year has been more of a slap than a knockout blow. The effective tariff rate on Canadian goods is running around 5%—annoying, but not catastrophic. That said, the damage is accumulating. June’s trade data showed a clear downturn in net exports, particularly to the U.S., Canada’s single most important customer.

The July jobs report didn’t help. Employment dropped by 41,000, dragging the six-month trend for private payrolls into negative territory. Statistics Canada noted that “Overall, there has been little net employment growth since the beginning of the year.” That’s not just noise—it’s a sign the labour market is losing steam.

The Bank of Canada forecasts agree. It sees first-half 2025 GDP shrinking by 1.5%. The Monetary Policy Report (MPR) also noted that “trade tensions have weakened economic activity and led to excess supply, estimating the output gap had widened to between -1.5 and -0.5%.”

The Bank of Canada inflation measures were 3.1% y/y and 3.0% y/y for CPI- median and trim, respectively. Both were sharply higher than the 2.3% and 2.4% results in August 2024 which explains the BoC’s reluctance to trim rates further. That inflation “stickiness” justifies the BoC’s stance.

US Inflation – Sticky or Slipping

Ask ten economists if inflation is heating up or cooling down, and you’ll get ten answers. That’s because there’s a whole smorgasbord of price data to choose from. In America, six major reports can rock markets, another half-dozen can do damage, and everyone picks the one that proves their point.

July CPI was a case in point. Headline inflation rose 0.2% m/m, down from June’s 0.3%. Core CPI—excluding food and energy—ticked up to 0.3% from 0.2%.

Hawks at the Fed can point to that firmer core number as proof that inflation isn’t done misbehaving. Fed Chair Powell and his camp will see it as a warning against cutting too early. Doves, including Governors Waller and Bowman, and certainly Governor nominee Stephen Miren, will focus on the headline slowdown and argue that the bigger risk lies in a cooling labour market and softening growth.

The latest CPI print is far from the last word on U.S. inflation. Between now and the Fed’s September 17 meeting, there are eleven more inflation-related releases to chew over, including Powell’s favourite gauge: the Core PCE Price Index.

Dodgy Data – Dodgy Decisions

President Trump and a host of analysts are up in arms over the latest employment report (August 1) because of the sizable downward revisions to the May and June results. The employment market is far less healthy than previously thought and the results raised questions about the accuracy and reliability of the data. President Trump reacted by firing the head of the Bureau of Labor Statistics, Erika McEntarfer, and has nominated EJ Antoni to replace her. Mr. Antoni is well known for his disdain for the data. In an interview on FOX News (before he was nominated for the BLS job), he spoke about the employment report and said its underlying methodology, economic modeling, and statistical assumptions are fundamentally flawed. Then he said, “Until it is corrected, the BLS should suspend issuing the monthly job reports but keep publishing the more accurate, though less timely, quarterly data.”

Piling On

Treasury Secretary Scott Bessent put the fox among the chickens on August 12 when he advocated for the Fed to cut rates by 50 bps in September and then upped the ante on Wednesday in a Bloomberg interview. He said, “If you look at any model, we should probably be 150, 175 basis points lower.”

Patience is a Virtue

The U.S. inflation data is softening, even if the month-to-month noise lets both hawks and doves save face, and the employment market is weak. Headline CPI is holding at 2.7% y/y, core at 3.1%, and the trend is down. That’s enough for the Fed to justify a cut in September.

The Bank of Canada does not have the same urgency. The latest weak jobs data follows a robust one in June. Canadian rates are already 175 bps lower than the Fed. A narrowing spread may weaken the Canadian dollar, which may not be such a bad thing in the face of aggressive U.S. tariffs on steel and aluminium, for example.

The Bank of Canada can afford to let the Fed take the lead. The BoC decision is announced at 10:00 am ET on September 17, while the Fed’s announcement is four hours later at 2:00 pm. Why not let the Fed take the lead?

If rates are going to deflate, the BoC’s happy to let the Fed stick the pin in first.