04:28 PM EDT, 09/12/2025 (MT Newswires) -- Ahead of the Sept.17 Bank of Canada interest-rate decision, the Canadian economy looks quite a bit different than it did in the lead up to the July decision, said National Bank in its 'Monthly Fixed Income Monitor' for September 2025, published Friday.

Earlier in the summer, National Bank noted, conditions looked like they may have been firming, leading markets to price out rate cuts. But, the bank said, that has changed dramatically in recent weeks. For one, it noted GDP growth was considerably weaker than expectations but more concerningly, the labor market appeared to hit a brick wall in July and August. Together, the two monthly reports more than wiped out the reported hiring surge in June, leaving cumulative job growth negative since January. "We don't expect much improvement anytime soon," National Bank added.

Ultimately, National Bank said, the question the BoC Governing Council will be asking itself is: Should policymaking prioritize current inflation readings and tariff-related risks, or should it lean into the growing excess capacity that may lead to lower inflation down the road? National Bank said it had already been more concerned about downside economic risks, but added the trajectory of recent data should see the Bank's priorities shift too. Indeed, National expects the central bank to resume its easing cycle in September. It noted the CPI report a day before the decision has the potential to complicate things, but still thinks the risk the data derails an expected cut is low. "Good things tend to come in pairs, and we still see a follow-on cut in October," it added.

When it comes to longer-term GoC yields, National Bank noted much will depend on fiscal policy. It said the federal government should be aware of the perils in running large and sustained deficits, with many case studies in other countries over recent years. "We hope these episodes are in the mind of those penning the budget." Ultimately, National Bank sees a higher (all-items) deficit trajectory in the cards with the debt burden edging a bit higher. However, it expects fiscal policy to remain anchored enough to avoid a wholesale repricing of the Canadian bond market. "Saying that, we're mindful that less fiscal discipline is a key risk," it added.