By Michael O’Neill

The Bank of Canada (BoC) finally caved. This morning, the Governing Council trimmed its overnight rate by 25 basis points to 2.5%—and it’s not just a one-off. This move marks the first cut since March and signals that the door is wide open for more easing. No one should have been surprised.

The Canadian economy shrank 1.6% in Q2 largely due to exports plunging by 27%, peak to trough in 2025. It cut a large swath through domestic industries including autos, steel, aluminum, lumber, canola, seafood, and copper. The Bank admits uncertainty is paralyzing corporate decision-making. Businesses aren’t investing; they’re waiting. The export drag is now feeding into employment, and the unemployment rate has climbed to 7.1%. Wage growth has cooled.

Labour Unrest Burys Inflation Fears

The BoC seems to have shelved their inflation concerns. Mr. Macklin echoed the US narrative that any increases in prices from tariffs would be a “one-off,” saying “we would look past that.”

Maybe they shouldn’t. Tariffs aren’t going away and that means business must pay more for parts and equipment and they are unlikely to want to see their margins erode. If the new higher price level persists and workers seek catch-up wage gains, wage inflation could become the next stage, and the players are already on the stage.

The sparks are already flying. Air Canada flight attendants staged a strike in August, postal workers are escalating job action, and more than 10,000 Ontario college staff have walked off the job. StatsCan reports strike days are running at levels last seen in the 1980s. Ottawa’s new ban on replacement workers has emboldened unions, and the combination of higher living costs, stagnant wages, and rising corporate prices is combustible. The BoC may be looking past tariffs, but if labour unrest pushes wages higher, inflation could resurface from the bottom up, catching policymakers flat-footed.

Fed Doves Come Home to Roost

The Fed did the expected and cut its benchmark rate by 25 bps to 4.25%. The statement was filled with the usual bafflegab about “balance of risks,” and being “attentive to both sides of the mandate”—but the real takeaway was simple: the Fed is worried about jobs (and that includes more than a few FOMC members).

Sticky inflation concerns have given way to the employment angst.  The inflation decline has slowed and they admit it, but downside risks to employment are suddenly the bigger bogeyman. That shift alone is dovish. Add in the latest dot-plot and its game, set, and match.

The projections show a clear dovish tilt. The September dot-plot slid lower across the board compared to June, with the median for 2025 down to 3.6% from 3.9% and 2026 at 3.4% from 3.6%. The 2027 projections are filler—ignore it.

Two Doves Do Not Make a Canadian Dollar Bull

The Fed and the BoC are strolling hand-in-hand down the path to lower rates, but they are cutting for different reasons. The Fed is worried about a weakening employment market and, for now, is less concerned about inflation. They upgraded their 2025 GDP forecasts to 1.6% from 1.4% in June, and 2026 GDP to 1.8% from 1.6% in June. They left the unemployment rate and inflation forecast unchanged.

There are other issues at play. President Trump is actively trying to turn the independent Federal Reserve into a department of the White House. The clues may be in the voting. One member wanted a 50 bp cut, which a safe guess would be Trump loyalist and newest Governor, Stephen Miran. Another voted to leave rates unchanged, which may be fired-unfired Governor Lisa Cook flipping the bird to Trump. Speculation—sure—but probable—yes.

The BoC rate cut was primarily driven by a deteriorating economic outlook, although the softer labour market got an honorable mention. USDCAD dropped on the news, falling from 1.3760 to 1.3727 but the move was reversed during Mr. Powell’s press conference.

The Canada and US 10-year and 2-year yield differential barely changed, which suggests that the well-defined USDCAD range of 1.3550-1.3950 will remain intact for the next month at least.

A patriotic Loonie can be heard singing “O Canada, I Stand My Ground for Thee.”