By Michael O’Neill
Put on your helmets and tighten your seatbelts. The Canadian economy is in for a rough ride and Bank of Canada Governor Tiff Macklem admitted as much in his press conference opening statement for the quarterly Monetary Policy Report (MPR) released October 29.
He said today’s 25-basis-point rate cut to 2.25% (which was widely expected) reflected ongoing economic weakness and contained inflation pressures. Then he proceeded to paint a grim outlook for the economy.
Reality Check
The MPR didn’t pull any punches. The trade conflict with the U.S. has fundamentally altered Canada’s economic trajectory. Growth has been downgraded. The Bank estimates that potential output will be 0.8% lower by 2026, and real GDP roughly 1.5% below the level projected at the start of the year.
Exports to the U.S. have plunged across metals, autos, and forestry. Steel and aluminum exports are down roughly 25% year-over-year, and softwood lumber’s latest inclusion in Trump’s tariff catalogue only deepens the hit.
Domestic demand isn’t much help. Business investment has cratered under uncertainty, while consumers, though still spending, are stretching their credit. Household savings have dropped to 5%, down from 7.2% a year ago. The only real bright spots—housing starts and resales—reflect a mini rebound driven by rate cuts, not renewed confidence.
Labour markets confirm the drag. Unemployment sits at 7.1%, the highest since 2016 outside pandemic years, and wage growth has cooled to 3%. Fewer new jobs are being created as population growth slows, meaning the employment rate will stabilize for the wrong reasons.
Headline inflation is 2.4%, and core remains sticky near 3%, but underlying downside momentum has faded. With the carbon tax removal and lower energy prices offsetting tariff pass-through, inflation should hover near target through 2026.
Loonie Doesn’t Blink
The loonie caught an updraft when the interest-rate decision statement was released. The trigger was this statement: “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.” Mr. Macklem said that monetary policy cannot offset the long-term implications of trade barriers or demographic change. Those sentences imply that the bar to further rate hikes is rather high—that is, unless economic growth continues to slow and unemployment keeps rising.
Take the Loonie Rally with a Dash of Red-Hot Wing Sauce
The Canadian dollar rode an updraft to start the day and continued to rise as long USDCAD positions got pared back as the 10-year CAD/U.S. interest-rate spread narrowed. The BoC may believe that monetary policy cannot offset the implications of trade barriers, but that is not their mandate. They are expected to “promote the economic and financial welfare of Canada by keeping inflation low and stable.” Trade headwinds caused by Trump’s tariffs, soft domestic data, stagnant demand, and high-unemployment risk are likely to force the BoC’s hand for another cut in December, which should reinforce the USDCAD floor in the 1.3790–1.3820 area.
America Is in a Better Place
The Fed trimmed rates by 25 bps, setting the new fed-funds range at 3.75–4.00%, and quietly ended its balance-sheet runoff as of December 1. That combo confirms that the Fed is in easing mode. Policymakers admitted growth is slowing, hiring is softening, and inflation, while still sticky, has stopped rising.
Two dissents revealed a divided Fed: one wanted a 50-bp cut to get ahead of the slowdown, while another wanted no move at all. But policymakers remained focused on employment, and the comment that “downside risks to employment have increased” means more rate cuts are in the pipeline. The odds of another 25-bp cut in December are 84.1%, according to the CME FedWatch tool.
Caution: Uneven Surface
The October MPR and today’s rate cut confirm what traders already suspected: Canada’s growth story has stalled, and policy options are shrinking. Inflation may be on target, but the price of stability is stagnation.
For now, the loonie’s modest strength masks deeper cracks. USDCAD’s technical picture reflects a market holding its breath as it chops within a well-defined range even as economic fundamentals deteriorate. Traders may find short-term opportunity in volatility, but the broader trajectory remains tied to a faltering economy struggling to find traction in a tariff-laden world.
The road ahead won’t be smooth. It will be, as Macklem warned, a long period of “structural adjustment.” Bumpy road ahead, indeed.
