The Bank of Canada has announced a reduction in its policy interest rate by 25 basis points, lowering it to 2.25 percent. This marks the second consecutive rate cut, as the central bank responds to persistent economic weakness and subdued inflationary pressures.
Bank of Canada Governor Tiff Macklem addressed the House of Commons Standing Committee on Finance alongside Senior Deputy Governor Carolyn Rogers, outlining the Bank’s latest monetary policy decisions and economic outlook.
“Last week, we lowered the policy interest rate 25 basis points, bringing it to 2¼%. This was our second straight cut and reflects ongoing weakness in the economy and contained inflationary pressures. We also published our outlook for the Canadian economy,” Macklem said.
Macklem identified four main messages from the Bank’s recent analysis. First, he noted that tariffs imposed by the United States and broader trade uncertainty have negatively affected Canada’s economic performance, with expectations for only modest growth for the remainder of this year and some improvement projected for 2026.
Second, while weak economic conditions are holding back price increases, Macklem pointed out that trade conflicts are increasing costs for many businesses. “We expect these opposing forces to roughly offset, keeping inflation close to the 2% target,” he said.
Third, Macklem explained that since early this year, the Bank has reduced its policy rate by a full percentage point to help support the economy during this period of adjustment.
Finally, he described current challenges as more than just cyclical downturns. “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,” he stated.
According to Macklem, Canada’s gross domestic product shrank by 1.6 percent in the second quarter due to reduced exports and business investment linked to tariffs and uncertainty about US trade policies. Sectors such as autos, steel, aluminum, and lumber have been especially hard hit. Despite these challenges, household spending remained strong during this period.
The labor market remains weak with job losses focused on sectors sensitive to trade issues; hiring across other parts of the economy has also been sluggish. The unemployment rate stood at 7.1 percent in September while wage growth slowed.
Looking ahead, GDP growth is expected to return but stay modest through late 2025 before improving further in subsequent years as exports and investment recover.
Inflation measured by consumer prices was at 2.4 percent in September—slightly higher than anticipated—but core measures have stabilized around three percent with upward pressure easing recently. The Bank expects overall inflation will remain near its two percent target over its forecast horizon.
“If the economy evolves roughly in line with our outlook, 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,” Macklem said. He added that future decisions will be based on new data as it becomes available: “If the outlook changes, we are prepared to respond.”
Macklem emphasized that monetary policy alone cannot undo damage caused by tariffs or fully restore previous levels of growth: “Trade friction means our economy will work less efficiently, with higher costs and less income… Monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path.”
He concluded by reiterating that maintaining confidence in price stability remains a top priority for Canadians amid global uncertainties.
“With that, the Senior Deputy Governor and I would be pleased to take your questions.”
