The Bank of Canada has reduced its key interest rate by 25 basis points to 2.5 percent, marking the first cut since March. This move aims to boost a struggling economy. Governor Tiff Macklem highlighted that the job market has weakened, inflation excluding gas has softened, and the removal of retaliatory tariffs against the U.S. by the federal government has reduced some inflation risks.
Macklem mentioned at a news conference in Ottawa that despite remaining uncertainties, the Governing Council decided to lower the policy rate to balance future risks due to the weaker economy and reduced inflation risks. The bank’s decision to cut rates was influenced by various factors since July, including the ongoing impact of the U.S. trade war on the Canadian economy.
Several major Canadian banks, including TD Bank, BMO, CIBC, and RBC, also decreased their prime rates to 4.70 percent following the Bank of Canada’s decision. The economy experienced a decline in GDP in the second quarter, exports to the U.S. decreased, and some businesses retracted investments in response to U.S. tariffs.
Macklem acknowledged the significant impact of tariffs on key Canadian industries and the loss of over 100,000 jobs in the last two months. While consumer spending was stronger than expected in the second quarter, weak employment conditions could affect households. Despite these challenges, Macklem expressed no expectation of a recession if current U.S. tariff policies towards Canada remain stable.
Economists anticipated the rate cut, especially after a subdued August inflation report. Eric Lascelles, chief economist at RBC Global Asset Management, stated that ongoing weak economic performance justifies central bank support. He suggested the possibility of further rate cuts in 2026. Inflation pressures are deemed more contained, with the Bank of Canada closely monitoring core inflation measures.
Macklem highlighted a target inflation range of one to three percent, emphasizing the need to balance economic growth and inflation. The Bank of Canada is set to announce its next interest rate decision on October 29.
