The Bank of Canada has announced a reduction in its target for the overnight rate by 25 basis points, bringing it to 2.5%. The Bank Rate now stands at 2.75% and the deposit rate at 2.45%.
The decision comes amid signs of slowing global economic growth. According to the Bank, "After remaining resilient to sharply higher US tariffs and ongoing uncertainty, global economic growth is showing signs of slowing. In the United States, business investment has been strong but consumers are cautious and employment gains have slowed. US inflation has picked up in recent months as businesses appear to be passing on some tariff costs to consumer prices. Growth in the euro area has moderated as US tariffs affect trade. China’s economy held up in the first half of the year but growth appears to be softening as investment weakens. Global oil prices are close to their levels assumed in the July Monetary Policy Report (MPR). Financial conditions have eased further, with higher equity prices and lower bond yields. Canada’s exchange rate has been stable relative to the US dollar."
Canada's own economy contracted by about 1.5% in the second quarter, which was anticipated by analysts. The Bank stated that "Canada’s GDP declined by about 1½% in the second quarter, as expected, with tariffs and trade uncertainty weighing heavily on economic activity. Exports fell by 27% in the second quarter, a sharp reversal from first-quarter gains when companies were rushing orders to get ahead of tariffs. Business investment also declined in the second quarter. Consumption and housing activity both grew at a healthy pace. In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending."
Labour market indicators have weakened recently: "Employment has declined in the past two months since the Bank’s July MPR was published. Job losses have largely been concentrated in trade-sensitive sectors, while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions. The unemployment rate has moved up since March, hitting 7.1% in August, and wage growth has continued to ease."
Inflation data show some stability: "CPI inflation was 1.9% in August, the same as at the time of the July MPR. Excluding taxes, inflation was 2.4%. Preferred measures of core inflation have been around 3% in recent months, but on a monthly basis the upward momentum seen earlier this year has dissipated." The statement added that other indicators suggest underlying inflation is running around 2.5%, while noting that "the federal government’s recent decision to remove most retaliatory tariffs on imported goods from the US will mean less upward pressure on the prices of these goods going forward."
The Governing Council explained its reasoning for lowering rates: "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." They also outlined their focus for upcoming decisions: "Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity. Governing Council is proceeding carefully, with particular attention to the risks and uncertainties." The council said it would monitor how exports respond to US tariffs and shifting trade relationships; how these changes affect business investment, employment and household spending; how cost effects are passed onto consumers; and trends in inflation expectations.
"The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval," according to its statement.
The next scheduled announcement regarding interest rates is set for October 29, alongside release of October's Monetary Policy Report.