The Bank of Canada has reduced its key interest rate by 25 basis points to 2.5 percent, marking its first cut since March, in a move to stimulate a struggling economy. Governor Tiff Macklem, during a news conference in Ottawa, mentioned that the job market has weakened, inflation excluding gas has eased, and the removal of retaliatory tariffs against the U.S. by the federal government has lessened some future inflation risks. Macklem stated that despite remaining uncertainties, the Governing Council found it appropriate to lower the policy rate to achieve a better balance of risks.
Various developments since July have influenced the bank’s decision to lower rates, with the ongoing U.S. trade war still significantly impacting Canada’s economic outlook. “The Canadian economy is feeling the effects of U.S. tariffs and the unpredictable nature of U.S. trade policy,” Macklem explained.
Following the Bank of Canada’s decision, major Canadian banks such as TD Bank, BMO, CIBC, and RBC have also decreased their prime rates by 25 basis points to 4.70 percent.
A Closer Look at the Canadian Economy
The second quarter saw a decline in GDP as anticipated by the central bank, with exports to the U.S. decreasing after an initial surge in response to U.S. tariffs. Some businesses have scaled back investments. Jonathon Azzopardi, owner of Laval Tool in Tecumseh, Ont., mentioned that while a rate cut benefits small firms, it may not lead to immediate investment growth.
Macklem highlighted the continued impact of tariffs on key Canadian industries such as auto, steel, and aluminum, along with additional tariffs on copper, lumber, and Chinese tariffs on canola, pork, and seafood. The Canadian economy has witnessed over 100,000 job losses in the past two months, pushing the unemployment rate to 7.1 percent.
Aside from significant job losses in tariff-affected sectors, employers in other industries are also refraining from hiring due to economic uncertainty. Although consumer spending was stronger than expected in the second quarter, the weakening job market could affect Canadian households, Macklem warned.
The Bank of Canada is not anticipating a recession if the U.S. maintains its current tariff policy toward Canada. However, a change in the tariff regime could alter this outlook. Macklem noted a more stable situation with U.S. tariffs since July, reducing near-term tariff uncertainties and affecting the bank’s forward-looking approach.
Most economists predicted the rate cut on Wednesday, especially following a subdued August inflation report. Eric Lascelles, chief economist at RBC Global Asset Management in Toronto, expressed that the economy’s underperformance due to the U.S. trade war warrants support from the central bank. Lagging growth, weak employment, and cooling inflation risks are pushing the Bank of Canada towards rate cuts.
Lascelles suggested the possibility of further rate cuts before 2026 and expects continued easing of interest rates in the first half of the year. The Bank of Canada will announce its next interest rate decision on Oct. 29.
Assessment of Inflation Pressures by Macklem
While the overall inflation rate is at 1.9 percent, the Bank of Canada focuses on core inflation measures excluding volatile sectors like gas. Macklem highlighted that the bank targets a two percent inflation rate, with core measures trending towards the upper limit but showing a recent easing in growth pace. He mentioned during a Q&A with reporters that inflationary pressures appear more contained, but the decision to cut the interest rate was influenced by weak economic growth to prevent significant cost of living increases for Canadians.
