The Bank of Canada has reduced its policy interest rate by 25 basis points, setting it at 2.5%. The decision was announced during a press conference held by Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers.
“Today, we lowered the policy interest rate by 25 basis points, bringing it to 2.5%,” Macklem stated. He explained that the Governing Council had been proceeding carefully amid ongoing trade upheaval and shifting economic risks since July.
Three main factors influenced the decision: further softening in Canada’s labour market, indications that upward pressures on underlying inflation have lessened, and the removal of most retaliatory tariffs by Canada, which reduces potential future inflation risk.
Macklem noted, “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.”
He also said the Bank would continue monitoring risks closely and remain ready to respond as new information emerges.
Recent global economic developments were highlighted as contributing factors. Global growth is slowing after resilience against higher US tariffs. In the United States, consumer caution has increased and employment gains have slowed. US inflation has risen as businesses pass tariff costs to consumers. China’s GDP growth has started to soften due to weaker investment.
The Canadian economy is experiencing effects from both US tariffs and unpredictable US trade policies. GDP declined by 1.6% in the second quarter, mainly due to decreased exports to the United States—partly attributed to earlier activity shifts and reduced demand caused by tariffs.
Several key sectors are being affected by tariffs, including autos, steel, aluminum, canola, pork, seafood, copper, and softwood lumber. This spread of direct impacts is expected to broaden economic challenges for these industries.
Uncertainty over trade policy has led many Canadian businesses to pause investment plans and express concern about weakening domestic demand as broader economic impacts emerge.
Despite some resilience in household consumption and housing activity during the second quarter, low population growth and continued labour market weakness are likely to weigh on spending in coming months.
Employment has fallen over the past two months with unemployment rising to 7.1%. Job losses have been significant in sectors reliant on US trade while hiring across other areas has slowed. Wage growth continues to ease.
On inflation trends, Macklem reported that CPI inflation remained at 1.9% in August; excluding taxes it was 2.4%. Core inflation measures have stayed near 3%, but recent monthly data shows dissipating upward momentum. Broader indicators suggest underlying inflation is around 2.5%.
The federal government’s move to remove most retaliatory tariffs on imports from the United States is expected to lessen future price pressures on those goods.
However, disruptions from shifting trade patterns are still likely to increase costs even as they suppress economic activity; how these will be reflected in consumer prices remains uncertain.
Although there has been some stabilization of US tariffs recently—slightly reducing near-term uncertainty—the upcoming review of the Canada-United States-Mexico Agreement and new threats of using tariffs for geopolitical leverage continue contributing to global instability.
Macklem summarized: “At this rate decision, there was clear consensus to lower our policy rate for the first time since March. We will continue to assess the impacts of tariffs and uncertainty on economic activity and inflation.” He added that attention will remain focused on exports’ evolution under current trade conditions; business investment; employment; household spending; supply chain cost effects; and changes in inflation expectations.
“We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval,” he concluded. “We will support economic growth while ensuring inflation remains well controlled.”
