The Bank of Canada announced a further reduction in its policy interest rate, lowering it by 25 basis points to 2.25 percent. This marks the second consecutive cut, reflecting ongoing economic weakness and subdued inflation pressures.
During a press conference, Governor Tiff Macklem was joined by Senior Deputy Governor Carolyn Rogers to discuss the decision and the central bank’s outlook for the Canadian economy. “Today, the Bank lowered the policy interest rate a further 25 basis points, bringing it to 2¼%. This was our second straight cut, and reflects ongoing weakness in the economy and contained inflationary pressures,” Macklem said.
The Bank outlined four key messages in its update. The first message highlighted that U.S. tariffs and trade uncertainty have weighed on Canada’s economic performance. The central bank expects only modest growth for the remainder of this year, with some improvement anticipated in 2026.
Macklem noted that while weak conditions are restraining price increases, trade disputes are also increasing costs for businesses, which could put upward pressure on inflation. “We expect these opposing forces to roughly offset, keeping inflation close to the 2% target,” he said.
To support economic adjustment during this period of disruption from U.S. trade actions, Macklem stated: “we have lowered our policy rate by 50 basis points over our last two meetings and by 100 basis points since the start of the year.”
He also emphasized that current challenges represent more than just a typical downturn: “the weakness we’re seeing in the Canadian economy is more than a cyclical downturn. It is also a structural transition.” According to Macklem, U.S.-imposed tariffs have caused lasting harm by reducing productive capacity and adding costs—factors that limit what monetary policy can achieve while maintaining low inflation.
For the first time since January and following months under new U.S. tariffs, the Bank has published a baseline forecast for growth and inflation instead of alternative scenarios. While acknowledging that American trade policies remain uncertain, Macklem said their effects are becoming clearer.
Recent data show Canada’s GDP contracted by 1.6 percent in the second quarter as exports and business investment declined due to tariffs and uncertainty surrounding trade with the United States. Sectors such as autos, steel, aluminum, and lumber were hit especially hard; however, consumer spending remained resilient along with an uptick in residential investment.
Labour market conditions remain soft according to recent figures: employment gains in September followed previous losses but job cuts were concentrated among industries sensitive to international trade; overall hiring across sectors has been weak; unemployment held steady at 7.1 percent last month while wage growth slowed.
Looking ahead, GDP growth is projected to resume but stay muted through year-end—averaging about three-quarters of one percent before improving gradually into 2026 as exports recover—reaching an average pace near one-and-a-half percent by 2027.
Even as recovery takes hold over time, total output will likely remain below earlier forecasts made prior to changes in U.S.-Canada trading relations—with half of this shortfall attributed directly to lost productive capacity from disrupted cross-border commerce.
On prices: Consumer Price Index (CPI) inflation stood at 2.4 percent in September—slightly above expectations—but underlying measures suggest momentum is easing toward two percent going forward.
“If the economy evolves roughly in line with the outlook in our MPR,” Macklem stated regarding future rates decisions, “Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment.”
He added there remains considerable unpredictability around U.S policies affecting Canada’s prospects: “US trade policy remains unpredictable…There continues to be considerable uncertainty…If the outlook changes we are prepared to respond.”
Macklem concluded by reiterating limitations faced by monetary authorities: “Canadian businesses and households are feeling consequences of increased US protectionism…monetary policy cannot undo damage caused by tariffs…Monetary policy can help adjust as long as inflation is well-controlled but it cannot restore [the] economy…”
“The Bank of Canada is focused on ensuring Canadians continue to have confidence in price stability through this period of global upheaval,” he said.
