Most economists predict that the Bank of Canada will overlook strong job growth and persistent inflation signals to implement a second consecutive interest rate cut this week. Doug Porter, chief economist at BMO, is among those forecasting a rate reduction on Wednesday. However, he acknowledges that recent economic data does not fully support this expectation.

"The two major economic reports we've had since the Bank of Canada last decided on interest rates were a strong jobs report and a bit higher than expected inflation report," Porter stated in an interview. "Taken in isolation, you would think there's no reason for the bank to be cutting interest rates."

In late September, the Bank of Canada reduced its benchmark interest rate by a quarter point to 2.5 percent, ending a three-month period of rate holds. As of Friday, financial market odds indicated more than an 80 percent likelihood of another quarter-point cut during the central bank's upcoming decision.

Statistics Canada recently reported a surprising increase of approximately 60,000 jobs in September. However, inflation for that month rose to 2.4 percent, a half-point increase from August, with the Bank of Canada’s preferred core inflation measures remaining above three percent. The central bank employs various definitions of core inflation to eliminate volatile factors from the consumer price index, aiming to better predict future inflation trends.

Porter noted that the strong inflation report from September complicates the decision to cut rates. He suggested that while the Bank of Canada could opt to maintain the current rate, he is leaning towards a cut based on the broader economic context. Despite the unexpected job growth, the labor market has seen minimal growth since January, largely due to uncertainties surrounding U.S. trade policies, which have dampened business hiring.

With the unemployment rate still high at 7.1 percent, Porter believes the job market requires relief through lower interest rates. The Bank of Canada has expressed some skepticism regarding the reliability of its core inflation metrics, indicating that policymakers currently view inflation around 2.5 percent.

"We think they should proceed carefully here, but ultimately they should proceed with lower rates," Porter added.

Economists at RBC also recognize the difficult decision facing the Bank of Canada this week. Nathan Janzen and Claire Fan noted in a client report that signs of labor market weakness and declining inflation expectations in the central bank's recent business outlook survey should give policymakers confidence that inflation will decrease further.

"This essentially means more room and flexibility for the central bank to have looser monetary policy," they wrote. However, they cautioned that further cuts would require a sharper economic downturn than currently anticipated.

Janzen and Fan argue that federal fiscal policy is better suited to address ongoing challenges from U.S. tariffs. The Bank of Canada must make its rate decision before understanding the federal government's spending plans, which will be outlined in the fall budget on November 4.

BMO forecasts that the Bank of Canada will continue to lower interest rates to a low of two percent before concluding the current easing cycle, which is among the lowest terminal rates expected by major forecasters.

Porter highlighted recent announcements from automakers Stellantis and GM, which are either pausing Canadian production or relocating it to the U.S., as indicators of the challenging economic environment. He anticipates that the federal budget next month will include stimulative spending, but he emphasized that Canada is facing unprecedented trade uncertainties that require robust responses from both monetary and fiscal policies.

The Bank of Canada has indicated it will revert to publishing a single, central economic forecast in an updated monetary policy report accompanying the rate decision on Wednesday. Previously, the central bank had provided illustrative scenarios based on potential developments in U.S. tariff policy.