The Bank of Canada has reduced its policy interest rate by 25 basis points, setting it at 2.5%. The decision comes as the Governing Council notes a weaker Canadian economy and less risk of inflation rising.
Governor Tiff Macklem addressed the current state of the economy, stating, “Through the recent period of trade upheaval, Governing Council has been proceeding carefully, paying particular attention to the risks and uncertainties facing the Canadian economy. Three developments have shifted the balance of risks since our July decision.”
Macklem outlined three main factors influencing the rate cut: a softer labour market in Canada, signs that upward pressure on underlying inflation has lessened, and reduced upside risk to future inflation following Canada’s removal of most retaliatory tariffs.
“Considerable uncertainty remains. But with a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks going forward,” said Macklem.
The Bank highlighted that global growth is slowing after showing resilience against higher US tariffs. In the United States, consumer caution and slower employment gains are evident, while inflation has increased as businesses pass tariff costs onto consumers. China’s economic growth also appears to be weakening due to declining investment.
Canada’s GDP fell by 1.6% in the second quarter. Exports to the United States dropped sharply due to both a reversal from earlier activity increases and ongoing tariff impacts. Several sectors—including automotive, steel, aluminum, canola, pork, seafood, copper, and softwood lumber—are experiencing direct effects from international tariffs.
Business investment in Canada contracted during this period as companies expressed concern over US trade policy unpredictability and potential weakening demand domestically.
There were some positive signs: consumer spending was stronger than anticipated in Q2 and housing activity rose. However, ongoing low population growth and job market weakness may limit household spending moving forward.
Employment figures show a decline over two months with unemployment rising to 7.1%. Job losses are concentrated in sectors reliant on US trade; other areas have also seen hiring slowdowns and wage growth ease.
On inflation trends, Macklem noted that CPI inflation held steady at 1.9% in August while preferred core measures remain near 3%. Monthly momentum in core prices has eased recently.
“The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the United States will mean less upward pressure on the prices of these goods going forward,” he said.
Despite these changes, shifts in trade patterns continue to disrupt economic activity and could add unpredictable costs for businesses and consumers alike.
Recent stability in US tariffs has lowered immediate uncertainty but concerns remain about future trade negotiations and new threats involving tariffs as geopolitical tools.
“At this rate decision, there was clear consensus to lower our policy rate for the first time since March,” Macklem said. He emphasized continued monitoring of exports, business investment trends, employment conditions, cost impacts from supply chain changes, and overall inflation expectations.
“We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled,” concluded Macklem.
