06:50 AM EDT, 10/27/2025 (MT Newswires) -- The United States Federal Reserve and Bank of Canada are both expected to cut policy rates on Wednesday, adding to 25bps reductions from each in September, said RBC.

Another reduction from the Federal Reserve is widely expected -- the Fed's policy rate is starting from a higher, more restrictive level than other central banks after cutting less since 2024, making it easier to justify additional reductions, noted RBC.

The decision from the BoC is less straightforward, stated the bank. The Canadian central bank has already cut interest rates significantly more than the Fed in recent years and inflation is still running above the 2% target.

Still, another 25bps rate reduction would leave the overnight rate at the bottom end, but not below, the BoC's 2.25% to 3.25% estimated neutral range -- in other words, still at levels that wouldn't be expected to significantly add to inflation pressures over time, pointed out RBC.

The bank thinks it's unlikely that the BoC expected the one 25bps cut in September -- the first reduction since March -- would be enough to make a significant difference in the economy. The reduction last month came amid elevated trade uncertainty, "a weaker economy, and less upside risk to inflation," according to the central bank.

Since September, data on growth and inflation haven't surprised enough on the upside to derail another reduction this month. The unemployment rate at 7.1% in September was still elevated despite a rebound in employment counts. Lower inflation expectations in the latest Business Outlook Survey are consistent with the BoC's assessment of fading upside inflation risks.

This essentially means more room and flexibility for the BoC to have looser monetary policy. Still, RBC continues to expect that further cuts to the overnight rate to more stimulative levels would be increasingly difficult to justify when core inflation is running persistently above target, barring a significant further deterioration in growth that isn't in its base case forecast.

To be sure, U.S. tariffs are still hurting targeted sectors, added the bank. RBC looks for manufacturing and wholesale production to contract in the August gross domestic product data on Friday.

Weakness in those sectors warrants a supportive policy response, but fiscal policy is more suited to respond to weakness in targeted sectors than blanket interest rate cuts, according to the bank. The federal budget on Nov. 4 is expected to contain significant deficit spending to support growth in 2026 and beyond.