With inflation concerns behind it, the Bank of Canada's task is to deliver enough interest rate relief to accelerate growth and begin to narrow the slack that has opened up in the labor market, said CIBC.

The result is that the uncertainties for United States trade
policy arising from Donald Trump's election will have more bearing on the requisite interest rate path and the composition of growth, than on the bank's projections for overall gross domestic product, inflation and unemployment.

CIBC's base case has Canada's central bank taking the overnight rate slightly into stimulative territory at 2.25%. However, if the country can't win an exemption from as
much as a 20% US tariff, the BoC will have to cut deeper, giving a greater push to domestic demand and helping exporters with a weaker Canadian dollar than what's in that base case outlook.

The bak's call for better than 2% average Canadian growth in 2025-2026, captures significant room for employment gains as the labor market recovers and productivity recovers from a cyclical slowdown.

Even assuming it takes a bit longer to reach federal targets for a lower level of international students and temporary workers, the Canadian population growth will decelerate from nearly 3% in 2024 to less than 1% in each of the next two years. But there's still substantial room for job gains, judged by an elevated 6.5% jobless rate, and a sub-par participation rate in both prime-age and youth populations.

Output per worker should be helped in part because many of the temporary workers and students who won't qualify for permanent resident slots will be those currently working in low-value-added jobs or only part-time. In addition, year-on-year growth in labor productivity is procyclical, showing a more than 60% positive correlation with real GDP growth in the last decade -- excluding 2020-21 to remove the pandemic's distortion in GDP shares for services and goods, pointed out the bank.

A recovery in demand enables businesses to make full use of their staff so after two years of outright declines in the face of weak economic growth, CIBC looks for output per hour to recover to its 2022 levels by 2026.

Slower population growth will cut into demand but should be more than offset by the stimulus of lower interest rates, added the bank. Cheaper credit and lower returns on savings should see household spending grow faster than income after an extended period in the other direction, and with a lag, CIBC would look for housing starts to gather steam.

Should trade barriers hold back exports, Canada will need even lower rates to power an even greater pick-up in domestic demand, according to the bank.