Bank of Canada lowers key interest rate to 2.25% in second straight cut
The Bank of Canada cut its benchmark interest rate by a quarter point Wednesday and signalled it may be satisfied with where the policy rate sits amid ongoing U.S. trade uncertainty.
The central bank’s key rate now stands at 2.25% after a second consecutive cut.
Bank of Canada governor Tiff Macklem said in prepared remarks that monetary policymakers feel the policy is at “about the right level” to keep inflation close to the bank's 2% target while supporting the economy through tariff disruptions—provided the economy evolves in line with its expectations.
Economists widely expected Wednesday’s cut as Canada’s economy shows cracks from U.S. tariffs but inflation appears largely under control.
Macklem said the central bank is expecting the pressures pushing inflation higher – costs related to tariffs, for example—will be largely offset by a weaker economy going forward.
The Bank of Canada returned to publishing a central forecast for the economy and inflation Wednesday, a practice it had foregone since January as tariffs clouded its outlook.
“It has now been six months since we have been living with U.S. tariffs. And while U.S. trade policy remains unpredictable, its impacts are becoming clearer,” Macklem said.
After the economy contracted in response to a sharp drop in exports in the second quarter, the bank now sees modest annualized GDP growth of 0.5% this quarter and one per cent in the fourth quarter.
The forecasts show growth will likely be restrained in the next two years, averaging 1.4%, as population growth slows and Canadian exporters attempt to diversify beyond the U.S. market.
The central bank expects trade disruptions will structurally reduce the size of Canada’s economy and forecasts GDP will be 1.5% lower by the end of 2026 than its projections before U.S. tariffs were imposed earlier this year.
Macklem noted that U.S. tariff policy remains “unpredictable.” He made a brief reference to U.S. President Donald Trump’s decision over the past week to abruptly halt trade talks with Canada over an Ontario ad campaign and threatened to impose an extra 10% tariff on Canadian goods.
This environment means the Bank of Canada can’t put as much stake in its forecasts as usual.
READ: Business confidence still weak as tariffs hold back investment: BoC
“The range of possible outcomes is wider than usual – we need to be humble about our forecast. If the outlook changes, we are prepared to respond,” Macklem said.
CIBC senior economist Andrew Grantham said in a note to clients Wednesday morning that the Bank of Canada "appears to be moving back onto the sidelines" to gauge incoming data. That includes the federal budget, set to be tabled on Nov. 4.
Grantham said he expects this will be the central bank's final cut of the cycle if the economy starts to recover from here and Canada secures a trade deal to reduce ongoing sectoral tariffs from the U.S.
"However, further cuts would certainly be justified if the economy continues to weaken and/or if the outlook for trade doesn't improve," he said.
Stephen Brown, deputy chief North America economist with Capital Economics, said in a note he expects the bank will continue to reduce its policy rate to as low as 1.75% in 2026.
He said he is expecting GDP will come in a touch lower than the Bank of Canada is now projecting in the years ahead, pushing inflation even lower and warranting more rate-cut relief for the economy.
