The Bank of Canada lowered its policy interest rate by 25 basis points today, setting the target for the overnight rate at 2.5%, with the Bank Rate at 2.75% and the deposit rate at 2.45%. The move marks the first rate cut since March and reflects growing concerns about a slowing domestic economy, persistent trade-related headwinds, and diminishing inflationary pressures.
Governor Tiff Macklem, speaking alongside Senior Deputy Governor Carolyn Rogers, emphasized that Governing Council is proceeding cautiously but saw enough evidence of softening conditions to justify a rate reduction. “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,” Macklem said.
A Slowing Domestic Economy
Canada’s economy contracted by roughly 1.5% in the second quarter of 2025, broadly in line with expectations but highlighting the challenges facing trade-sensitive sectors. Exports plummeted by 27% following strong first-quarter gains, when firms accelerated shipments ahead of new U.S. tariffs. Business investment also fell sharply as companies delayed capital expenditures amid uncertainty.
Employment trends added to policymakers’ concerns. The unemployment rate rose to 7.1% in August, the highest since early 2023. Job losses have been concentrated in manufacturing, metals, and resource-linked sectors exposed to tariffs, but hiring intentions across the broader economy have also cooled. Wage growth has slowed further, underscoring weaker labor market dynamics.
While pockets of resilience remain—household consumption and housing activity both registered healthy growth—the Bank noted that sluggish population growth and weakening employment prospects will likely weigh on household spending in the months ahead.
Global Backdrop: Tariffs and Slowing Growth
Global conditions are adding to the pressure. After showing resilience earlier in the year, world growth is slowing:
- In the United States, business investment has been robust, but consumer spending is more cautious and job creation has slowed. U.S. inflation has picked up as firms pass along tariff-related costs to households.
- In the Euro area, growth momentum has moderated, with U.S. tariffs dampening export activity.
- China’s economy, while stable in the first half of the year, is now showing signs of softening as investment weakens.
- Oil prices remain near the levels assumed in the Bank’s July Monetary Policy Report, while global financial conditions have eased due to higher equity prices and lower bond yields.
Against this backdrop, Macklem highlighted that Canada is “being affected by both U.S. tariffs and the unpredictability of U.S. trade policy.” He pointed to new and existing tariff measures impacting Canadian exports of autos, steel, aluminum, lumber, copper, canola, pork, and seafood.
The upcoming review of the Canada-United States-Mexico Agreement (CUSMA) is another source of uncertainty, while recent U.S. rhetoric suggests tariffs may increasingly be used as a tool of geopolitical pressure.
Inflation Dynamics: Diminished Pressures
Inflation developments gave the Bank additional room to ease. Headline CPI inflation was 1.9% in August, unchanged from July, while inflation excluding taxes was 2.4%.
The Bank’s preferred measures of core inflation have hovered around 3% in recent months. However, Macklem noted that “the upward momentum seen earlier this year has dissipated.” Broader indicators, including alternative core measures and the distribution of price changes, suggest underlying inflation is running around 2.5%.
The federal government’s decision to remove most retaliatory tariffs on U.S. imports has also reduced future inflation risks by alleviating upward pressure on certain consumer goods prices.
With inflation expectations well anchored and upside risks easing, the Bank concluded that policy accommodation was warranted to support growth.
Balancing Risks: The Governing Council’s Rationale
The decision reflects a careful recalibration rather than a shift toward aggressive easing. Macklem explained that three developments since July tilted the balance:
- A softer labor market with rising unemployment and slowing wage gains.
- Easing inflationary pressures, with diminished momentum in underlying price growth.
- Reduced tariff-related price risks following Ottawa’s decision to scale back retaliatory measures.
Still, uncertainty remains high. “The disruptive effects of shifts in trade will add costs even as they weigh on economic activity,” Macklem said, noting that the magnitude and channels of cost increases are difficult to predict.
The Bank stressed it will assess a wide set of factors going forward, including:
- The trajectory of exports under U.S. tariffs.
- The degree of spillover into investment, employment, and household demand.
- How trade-related cost increases feed into consumer prices.
- The evolution of inflation expectations among households and businesses.
Market and Policy Implications
Financial conditions have already eased, with equity prices higher and bond yields lower since July. The Canadian dollar has remained relatively stable against the U.S. dollar, reflecting similar pressures on both economies.
Today’s move reinforces the Bank’s commitment to supporting economic growth while safeguarding price stability. Analysts expect policymakers to remain data-dependent and cautious, with further easing possible if trade disruptions intensify or if domestic weakness deepens.
The Bank’s next scheduled policy announcement will be on October 29, 2025, coinciding with the release of the October Monetary Policy Report.
Conclusion
By cutting the policy rate to 2.5%, the Bank of Canada is signaling its readiness to cushion the economy against external shocks while maintaining inflation control. The decision underscores the challenges of navigating a period marked by tariff-driven volatility, slowing global growth, and a softening domestic labor market.
While the reduction may provide short-term relief to households and businesses, the medium-term outlook remains clouded by uncertainty. As Macklem emphasized, Governing Council will “be ready to respond to new information” and stands prepared to adjust policy should risks evolve further.
Source
Bank of Canada, Monetary Policy Decision: Press Release, September 17, 2025. Available at:
https://www.bankofcanada.ca/2025/09/fad-press-release-2025-09-17/Monetary%20Policy%20Decision%20Press%20Conference%20Opening%20Statement
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