The Bank of Canada has made a cardinal decision on rates

The Bank of Canada has decided to cut its key interest rate again, setting the overnight rate at 2.25 percent. This marks the second consecutive step toward easing monetary policy.

Representatives from the financial regulator explained that this move was made due to ongoing weakness in the national economy and forecasts indicating inflation will stabilize near the two percent target. The decision was in line with expectations from private sector experts.

Statements from Bank of Canada Leadership

During a speech in the capital, Governor Tiff Macklem noted that the cumulative 100 basis point rate cut since the beginning of the year is aimed at supporting the economy during what he described as "a period of adjustment."

"The weakness we're seeing in the Canadian economy is more than just a cyclical downturn. It's also a structural transition," Macklem stated.

According to the central bank chief, U.S. tariffs and trade uncertainty have negatively impacted the Canadian economy, increasing costs for many businesses and creating inflationary pressure.

Trade Disruptions and Their Consequences

The rate cut decision came amid escalating trade tensions. Over the weekend, U.S. President Donald Trump announced an additional 10 percent tariff on Canadian goods. This move dealt another blow to Canadian businesses, whose optimism about trade relations with the U.S. had already suffered after Trump ended negotiations with Canada.

In its first Monetary Policy Report with a baseline forecast since January, the Bank of Canada indicated that changes in U.S. trade policy will have a prolonged negative impact on economic activity.

In the first half of the year, the trade conflict led to a significant increase in uncertainty, which contributed to:

• A decline in GDP
• Falling exports and business investment
• Rising unemployment

Economic Indicators

According to the regulator's data, GDP contracted by 1.6 percent in the second quarter. Steel and aluminum exports dropped by approximately 25 percent compared to the same period last year. Overall exports fell by about five percent in the second quarter on an annual basis.

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The most significant decline was seen in spending on industrial equipment and machinery. Meanwhile, consumer spending increased primarily due to a surge in car purchases. Housing investment also showed growth amid increased home sales and residential construction.

Annual inflation unexpectedly jumped to 2.4 percent in September from 1.9 percent the previous month, mainly due to rising gasoline and food prices. Core inflation, which excludes volatile components, remains in the target range at around 3 percent.

Forecasts and Outlook

Macklem suggested a possible pause in rate cuts if the economy develops in line with the central bank's latest forecasts. However, he acknowledged the need for "humility" in forecasting, given the high level of unpredictability.

"If the economy evolves roughly in line with the outlook in our MPR (Monetary Policy Report), the Governing Council sees the current policy rate at about the right level," Macklem noted.

The central bank's overnight rate has reached a level that policymakers assess as the lower bound of the neutral rate.

The central bank forecasts inflation will stabilize around two percent in early 2026 and remain at that level through 2027. If the situation changes, the regulator is ready to "respond."

Long-term Consequences

The impact of tariffs and trade uncertainty is expected to continue into next year, when the Canadian economy will be on a lower growth trajectory. Compared to the January report, the central bank estimates that the trade conflict will reduce GDP by 1.5 percent, or about $40 billion, compared to what was originally expected by the end of 2026.

GDP growth is forecast to average around 1.4 percent in 2026 and 2027. Policymakers expect exports to resume growth in 2026 driven by external demand, but at a lower level than previously anticipated.

Until then, the bank believes exports will fall in the second half of 2025 due to tariffs and slowing demand in the U.S. Imports are also expected to decline through the end of 2025 due to tariffs and lower domestic demand.

Upcoming Events

In less than a week, Prime Minister Mark Carney will present his government's first budget. Carney has promised generational investments alongside fiscal restraint.

The Bank noted that its forecasts took into account pre-budget announcements, including a $9 billion increase in defense spending. The regulator expects moderate growth in government spending in 2026 and 2027.

The bank's next interest rate decision is scheduled for December 10.