Bank of Canada warns AI-driven job losses could require larger rate cuts

A Bank of Canada working paper released on July 29, 2026 examines how artificial intelligence could affect employment and inflation. The authors model two sectors: one that adopts AI and reduces its workforce, and another that continues operating near capacity. They find that if AI merely augments productivity, a 1.48‑percentage‑point interest‑rate cut would be needed to restore full employment. However, if AI automates tasks and displaces workers, the required cut rises to 3.34 points, creating a greater inflationary pressure because the rate cut also fuels demand in the already‑strained sector. The paper argues that automation presents a larger challenge for monetary policy than productivity gains, noting that “the apparent stability is cancellation, not balance.” The analysis is illustrative and not a policy recommendation, but it highlights potential trade‑offs for the central bank as AI adoption expands across the Canadian economy.