The Bank of Canada announced a reduction in its policy interest rate by 25 basis points, bringing it down to 2.25%. This marks the second consecutive rate cut, with the central bank citing ongoing economic weakness and subdued inflationary pressures as key reasons for the decision.
Governor Tiff Macklem, joined by Senior Deputy Governor Carolyn Rogers, outlined four main messages at a press conference following the release of the Bank’s latest Monetary Policy Report. He said, “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 attributed much of the recent economic slowdown to US tariffs and persistent trade uncertainty. “First, US tariffs and trade uncertainty have weakened the Canadian economy. We expect very modest growth through the rest of the year, with some pickup in 2026,” he said.
He also highlighted that while weaker growth is limiting price increases, new costs imposed on businesses due to trade conflicts are putting upward pressure on inflation. Macklem explained, “Second, while this weakness is restraining price increases, the trade conflict is also adding costs for many businesses, putting upward pressure on inflation. We expect these opposing forces to roughly offset, keeping inflation close to the 2% target.”
In response to these challenges, Macklem noted that monetary policy has been adjusted: “Third, to support the economy through this period of adjustment, 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 added that current economic difficulties reflect not only cyclical factors but also structural changes: “And finally, the weakness we’re seeing in the Canadian economy is more than a cyclical downturn. It is also a structural transition. The US trade conflict has diminished Canada’s economic prospects. The structural damage caused by tariffs is reducing our productive capacity and adding costs. This limits the ability of monetary policy to boost demand while maintaining low inflation.”
For the first time since January—the beginning of heightened US-Canada trade tensions—the Bank published a baseline outlook for economic growth and inflation rather than alternative scenarios. Macklem said this change was made because “it has now been more than six months since we have been living with US tariffs,” making their effects clearer.
Recent data show clear signs of strain on Canada’s economy from these external pressures. In particular, GDP shrank by 1.6% in Q2 as exports and business investment dropped due to tariffs and uncertainty. Targeted sectors such as autos, steel, aluminum and lumber have experienced severe impacts from US trade actions.
Labour market indicators reveal softness as well; job losses have been concentrated in sectors most sensitive to trade disruptions and hiring across other industries remains weak. The unemployment rate stood at 7.1% in September with slowing wage growth.
The Bank expects GDP growth to resume but remain weak through late 2025 before picking up slightly in 2026 as exports and investment recover—though overall output will remain below pre-tariff forecasts even into 2027.
Inflation figures for September showed CPI at 2.4%, just above expectations; core measures remained around 3%, but underlying momentum appears stable or easing somewhat.
Macklem stressed that future adjustments could be made if conditions shift: “If the outlook changes, we are prepared to respond.” He acknowledged ongoing unpredictability in US trade policy continues to cloud forecasts.
“Canadian businesses and households are feeling the consequences of increased US protectionism,” he said. “It is difficult, and ongoing uncertainty is compounding the difficulty… Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income.”
He concluded by emphasizing confidence in price stability: “The Bank of Canada is focused on ensuring Canadians continue to have confidence in price stability through this period of global upheaval.”
