On the Radar: Why a September 17 Bank of Canada Rate Cut Looks “Almost Certain”

  • First National Financial LP

Quick Takes:

  1. Markets now price 90–92% odds of a September 17 BoC cut after weak Q2 GDP, softer August jobs and PMI, and easier U.S. producer prices, despite today’s U.S. CPI at 2.9% y/y and 0.4% m/m. 
  2. Canada’s curve has split, with the front end pointing to easing while global term premium and fiscal supply lift long yields
  3. The case is “almost certain” as growth slows, upstream inflation cools, and Fed easing looks near, reducing currency and transmission risks to a BoC cut.

This week pricing in Canadian money markets implied roughly a 90% odds that the Bank of Canada would cut the overnight rate on September 17. That conviction did not emerge in a vacuum. It followed a run of weak Canadian data, a negative surprise in U.S. wholesale inflation that bolstered North American easing expectations, and a broader backdrop in which long‑term yields are being held up by term‑premium and fiscal forces rather than hot inflation.

Today, it was released that the U.S. CPI rose 0.4% m/m and 2.9% y/y in August, with core up 0.3% m/m and 3.1% y/y, matching core forecasts but topping the consensus on the headline monthly gain. The print nudges inflation concerns higher than July’s 2.7% y/y, yet economists and futures markets still see a Fed cut next week, given labor‑market softness and yesterday’s ‑0.1% m/m PPI surprise.

For the BoC, the CPI data may slightly trim the odds of larger or faster follow-on cuts, not the probability of a quarter‑point move on September 17.

What Has Been The Cause Of The “Almost Certain” Rate Cut?

Canada’s economy shrank at a 1.6 percent annualized pace in the second quarter, a much deeper contraction than forecasters expected. Exports were the main drag and business investment softened, with household and government outlays providing only a partial offset. That weak print arrived just ahead of September and set the tone for early‑month trading: investors shifted from “maybe later” to “likely now” on BoC easing.

The follow‑through came from August data. The S&P Global manufacturing PMI stayed below 50 for a seventh month, at 48.3, consistent with a sector still in contraction even if the pace of decline moderated. Then the August jobs report showed a large employment drop and a rise in the jobless rate to a non‑pandemic high, sealing the market’s view that policy insurance is warranted.

It is a similar situation in the U.S.  On Wednesday, the U.S. Producer Price Index fell 0.1 percent month over month, a surprise that cooled fears of sticky pipeline inflation ahead of the September Federal Reserve meeting. Traders promptly upped bets that the Fed would begin cutting a week later and continue through the year‑end. That shift matters in Canada for two reasons. First, it reduces the risk that a BoC cut would widen Canada‑U.S. rate differentials in a destabilizing way. Second, it tends to pull U.S. Treasury yields lower at the front and intermediate tenors, which often transmits to GoC yields in the same parts of the curve.

The housing finance signal in the U.S. underscores the point. The Mortgage Bankers Association reported that the average 30‑year fixed mortgage rate fell to 6.49 percent in the week ended September 5, an eleven‑month low, with applications up sharply. U.S. mortgage rates are not Canadian mortgage rates, but they are a visible gauge of global funding costs for household credit. When U.S. fixed mortgage rates slide on a combination of softer data and expectations of policy easing, it often coincides with improved wholesale funding conditions that Canadian lenders can tap, narrowing the spreads they add on top of GoC benchmarks.

At the same time, the back end of the curve remains anchored by a different story. Since late August, term‑premium and fiscal concerns have dominated the long end in major markets. Strategists widely expect the U.S. Treasury curve to steepen as the Fed pivots to cutting while heavy supply and deficits keep longer maturities “sticky.” That same logic applies in Canada, where long‑dated GoCs tend to move with Treasuries. The result is a split dynamic: front‑end Canadian yields have fallen on growth and jobs weakness, while longer‑dated yields wobble with U.S. supply expectations and global risk appetite.

So why “almost certain” rather than merely “probable”? Because the case checks all the boxes the Bank of Canada usually cites before an insurance move. First, activity. A negative quarter, a manufacturing contraction streak, and a labor report that points to slack are the classic trio that pushes a flexible inflation‑targeting central bank toward precautionary easing. Second, inflation risk. A negative PPI surprise in the U.S. is not Canadian CPI, but it is a strong signal that upstream price pressure is cooling across North America. It supports the view that cutting now does not risk re‑accelerating inflation, particularly if energy’s influence proves contained. Third, coordination. With the Fed now seen as starting an easing cycle, the BoC is less constrained by relative‑rate concerns. A synchronized turn lowers the odds of sharp currency moves or spillovers into financial conditions that would offset the cut’s benefits. On all three, the evidence in the September 8–10 window pointed the same way.  

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