Rate lowered to 2.25% amid structural economic changes
The Bank of Canada reduced its benchmark interest rate for the second consecutive time, lowering it to 2.25%, the lowest since mid-2022. However, it also signaled that further cuts are unlikely. The central bank described the current rate as “about right” to maintain inflation near the 2% target while supporting the economy through a period of structural transition.
This shift in tone suggests a pause in the easing cycle. BMO economist Robert Kavcic noted that the language signals an end to the current rate-cutting trend. Bond yields rose, and the Canadian dollar gained as markets priced out further cuts in the near term.
Tariffs reshape Canada’s economic outlook
According to the BoC, the latest rate cut reflects ongoing economic weakness and stable inflation. But Governor Tiff Macklem emphasized that the downturn goes beyond a standard cycle, highlighting deeper structural challenges, especially from U.S. trade tariffs.
The Monetary Policy Report forecasts Canadian GDP to be 1.5% lower by the end of 2026 compared to January projections. Sectors like autos, steel, aluminum, and lumber have been hit hardest. Macklem noted that monetary policy can help with the adjustment, but not reverse the lasting damage.
Slow growth expected, inflation near target
Canada’s GDP is expected to grow just 1.2% in 2025 and 1.1% in 2026. Macklem described the near-term outlook as weak, saying small positive or negative quarters “won’t feel very good.” Meanwhile, inflation is expected to remain near the 2% target, with core measures around 2.5%.
The labor market remains soft, with unemployment steady at 7.1%. Hiring has slowed, particularly in trade-sensitive industries. Household demand, however, has held up due to recent rate cuts supporting spending and housing. Still, slower income growth and job uncertainty are expected to dampen consumption moving forward.
Uncertainty lingers despite policy clarity
Though the BoC hinted at pausing further cuts, economists believe uncertainty remains high. BMO still sees room for another cut in early 2026 if job market softness persists. TD also warned about rising uncertainty ahead of the next CUSMA trade negotiations.
Macklem echoed these concerns, saying forecasts must be made with humility due to ongoing volatility. The BoC only recently returned to a single base-case forecast after months of relying on scenario-based projections. September’s earlier 25-basis-point cut was the first since March, reflecting weak employment data and subdued inflation.
