What’s going on here?
National Bank is flagging signs of a slowing Canadian economy, predicting the Bank of Canada will soon restart interest rate cuts – even as higher government deficits weigh on the country’s longer-term outlook.
What does this mean?
Not long ago, stronger economic signals had investors expecting rates to stay put. But fresh numbers are changing that story: Canada’s GDP growth has slipped, and the labor market hasn’t added any net jobs since January 2025. In its September Fixed Income Monitor, National Bank highlights the pressure on policymakers – balancing stubborn inflation and new tariffs against unmistakable economic slack. The bank now forecasts a rate cut as soon as September 17, and possibly another in October if weak conditions persist. While upcoming inflation data could muddy the decision, National Bank thinks it won’t derail the move toward cuts. Still, the bank’s caution runs deeper: it warns that Canada’s widening deficits and rising debt could eventually threaten fiscal stability, with the potential to drive government bond yields higher if investor confidence wavers.
Why should I care?
For markets: Markets brace for lower rates but fiscal risks remain.
Markets are already betting on soon-to-come rate cuts, with Canadian government bond yields ticking down and borrowing costs likely to ease for households and businesses. But persistent deficits and growing debt could reverse that trend, pushing yields back up if investors start to worry about the country’s fiscal path. So even as relief looks likely in the near term, markets will be paying attention to whether Ottawa keeps its longer-term promises.
The bigger picture: Canada’s crossroads could shape global thinking.
Canada’s push to support growth while managing mounting debt echoes a dilemma facing economies worldwide. National Bank’s warnings recall times when sustained deficits rattled bond markets and dented confidence elsewhere. While Canada isn’t in crisis mode, how it addresses debt and budget gaps could influence how investors see other developed markets trying to strike the same delicate balance.
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