MNI INTERVIEW: Further BOC Cut Unclear In Trade War Fog-Mendes

Bank of Canada Deputy Governor Rhys Mendes told MNI the economy remains in flux from the U.S. trade war, making it difficult to assess if another interest-rate cut will follow September's reduction.

Asked whether it would be unusual for the Bank to cut just once in response to a shock, Mendes said: “This environment is somewhat unique, and we’re going to have to take our interest-rate decisions in this environment one at a time.” (See MNI INTERVIEW: Canada Needs More Than One Rate Cut-Ex Dep Lane)

“I can’t pre-judge where we will end up,” he said in an interview Thursday. The Bank lowered the policy rate to 2.5% from 5%, with seven consecutive moves from last June to March, resuming again last month after three meetings on hold. Economists surveyed by MNI predict one or two more quarter-point moves by early 2026. 

"We’re facing an environment that has the potential to evolve very rapidly. So we’re taking a shorter horizon,” Mendes said. “Usually when we try to think about policy, we tend to look fairly far into the future because it takes time for monetary policy to have its full effect."

"We’ve tried to emphasize that in thinking about the impact of the trade war we’re going to be looking number one at the impact on exports but then how that spills over to the broader economy, to employment and spending.” 

NO SAFE HAVEN

With Canada dropping most retaliatory tariffs, Mendes says more attention can be paid to the spillover effect of global trade disputes. "It’s not so much the retaliatory tariffs that are going to cause a boost to inflation, but there is a question around how the reconfiguration of trade as a result of U.S. tariffs, not just on Canada but more broadly, may affect costs and may push up inflation,” he said.

Canada's economy shrank in the second quarter, and the Bank sees growth at about an annualized 1% over the second half of 2025. Canada's dollar has been fairly stable, breaking an historic pattern of depreciations in response to shocks, though Mendes suggested its resilience appears tied to weakness in the greenback.

"We didn’t see the U.S. dollar playing its usual safe-haven sort of role," he said. "There has been lots of discussion in markets around diversification beyond U.S. assets, we’ve seen increased hedging of U.S. dollar exposures.”

“It’s more that the shift in perceptions about the U.S. dollar has caused it to behave differently and that’s why we haven’t seen sort of what economists might have normally expected for the Canadian dollar.”

Mendes spoke after a speech outlining potential changes to how the Bank will track core inflation after next year's framework review. Mendes stressed officials always watch a broader range of indicators than preferred core inflation indexes.

DIGGING INTO CORE DETAILS

“We do an assessment of where underlying inflation is, but then we also try to think about the likely dynamics going forward, and to get a sense of those dynamics we dig into the details,” he said. Underlying inflation has been closer to 2.5% than the 3% in core CPI indexes, and Mendes said evidence shows two big drivers of inflation are fading-- shelter and goods ex-energy. 

“Rents are coming down because market rents are lower than what’s embedded in the CPI, because market rents only affect new rentals as people move or new rental contracts are established," he said. “That gives us some comfort that shelter inflation is continuing to moderate. At the same time when I look at non-energy goods, input cost growth has moderated.”

The Bank is reviewing whether to abandon the preferred core indexes label or to highlight a wider array of trend measures. Asked whether it would be simpler to use CPI excluding food and energy, he said: “We are trying to on the one hand to have the best measures that we think we need to inform our decision making, while at the same time in other ways ensuring that our communications are accessible to the broader public.” (See: MNI INTERVIEW: True Inflation Trend Hard To Pin Down- StatsCan)

Global frictions threaten to disrupt not just inflation but price expectations, he said. "If we’re in a more shock-prone world where inflation itself could be more volatile, increased inflation volatility could also just cause increased volatility in inflation expectations.”