10:07 AM EDT, 08/29/2025 (MT Newswires) -- Unlike at least two of his counterparts at other banks, TD's economist Rishi Sondhi is still unconvinced the Bank of Canada will cut interest rates in September, but might delay on it until later in the year instead, after today's Canadian GDP data.

As expected, TD's Sondhi said, the economy contracted in the second quarter, as exports were "walloped" by the 'one-two punch' of weaker U.S. demand and the unwind of a tariff-front running induced surge in Q1. But he noted "final domestic demand held up much better than overall GDP (+3.5% q/q), buoyed by a surprisingly strong, broad-based surge in consumer spending and one-time equipment import for an offshore oil field in Newfoundland and Labrador." Moving forward, Sondi said, consumption growth could ease from its hefty second quarter pace, reflecting the cooler jobs market. He noted that employee compensation advanced at its slowest pace since the pandemic in the second quarter.

According to Sondhi, today's GDP data fell in almost exactly in line with what the BoC expected in their latest forecast. However, he noted, domestic demand looks to have surprised on the upside. On the margin, Sondhi said, this could enhance the argument for the Bank to stand pat on rates at their September 17th meeting. However, policymakers still have one more jobs and inflation report to digest before that time.

Sondhi said: "The contraction in overall GDP also implies that slack built in the economy in Q2, and even with a better performance in Q3 likely on tap, the economy probably remains in excess supply. This points to further downward pressure on inflation and could pave the way for more rate cuts this year... especially with a policy rate only at the mid-point of what the Bank considers neutral for the economy. For their part, markets are pricing in a 55% chance of a cut in September, although one taking place by year's end is fully priced in."

Meantime, Desjardins is retaining its forecast that the Bank of Canada will resume its cutting cycle in September as a result of today's headline miss for Q2 GDP and no signs of momentum heading into the third quarter.

According to Sondhi, today's GDP data fell in almost exactly in line with what the Bank of Canada expected in their latest forecast. However, domestic demand looks to have surprised on the upside. On the margin, this could enhance the argument for the Bank to stand pat on rates at their September 17th meeting. However, policymakers still have one more jobs and inflation report to digest before that time. The contraction in overall GDP also implies that slack built in the economy in Q2, and even with a better performance in Q3 likely on tap, the economy probably remains in excess supply. This points to further downward pressure on inflation and could pave the way for more rate cuts this year (see our updated forecast), especially with a policy rate only at the mid-point of what the Bank considers neutral for the economy. For their part, markets are pricing in a 55% chance of a cut in September, although one taking place by year's end is fully priced in.

Royce Mendes at Desjardins noted Government of Canada bond yields were falling, as analysts in the "no cut" camp revisit their assumptions and traders begin to price in more easing. That said, Desjardins remains of the view that the central bank will do more than what the market is pricing even after today's moves.

Elsewhere, Andrew Grantham at CIBC said a weaker-than-expected trend in monthly GDP figures is supportive for CIBC's forecast of a September interest rate cut, although the bank notes that upcoming employment and CPI data will still be important for that call.

Grantham's comments came after the CIBC man noted a slump in exports, driven by the imposition of U.S. tariffs and a reversal of Q1's front-loading activity, drove a contraction in Canadian GDP during the second quarter.

Grantham said the 1.6% annualized contraction was worse than the consensus projection (-0.7%), but broadly in line with the Bank of Canada's July MPR forecast. He noted exports slumped by 27%, eclipsing the more moderate 5% decline in imports. Domestic demand, however, was "actually fairly solid", rising by 3.5% following a downwardly revised 0.9% drop in Q1. However, Grantham also noted, the average of the first half of the year (just over 1%) is still consistent with demand growing slightly below its long-run potential. "For the second quarter, increases in residential investment, consumer spending and government outweighed the understandable (given trade uncertainties) drop in business investment," Grantham added.

Grantham also noted monthly data for June was weaker than expected, showing a 0.1% reduction in GDP (consensus +0.1%) driven largely by a drop in the manufacturing sector. He said while that June drop is projected to have been reversed in July (+0.1% advance figure), that still leaves momentum heading into Q3 weaker than CIBC or the BoC were likely expecting. Grantham noted early tracking for Q3 is between 0-0.5% depending on growth rates assumed for the remainder of the quarter, in contrast to the BoC's July MPR projection of +1%. "That weaker than expected trend in the monthly figures makes today's release supportive for our forecast of a September interest rate cut, although upcoming employment and CPI data will still be important for that call," he added.