Bank of Canada cuts interest rates by 25 basis points as expected, says current rate is appropriate, and significantly lowers economic growth forecast.
On Wednesday local time, the Bank of Canada cut interest rates, lowering its benchmark overnight rate by 25 basis points for the second consecutive meeting. After this rate cut, the rate stands at 2.25%, the lowest level since July 2022.
The Bank of Canada also significantly lowered its economic growth forecasts, painting a gloomy picture of the economy. In prepared remarks, Governor Tiff Macklem described the trade dispute with the United States as a structural shift, stating that it has weakened Canada’s economic outlook.
However, the Bank of Canada pushed back on expectations for further rate cuts, saying that the current policy rate is roughly appropriate—it can keep inflation close to the 2% target while helping the economy through the adjustment period. This depends on inflation and economic activity aligning with forecasts. "If the outlook changes, we are ready to respond."
The announcement of the Bank of Canada's rate decision and monetary policy report comes one week before Prime Minister Mark Carney’s government is set to unveil its first budget. The budget is expected to heavily invest in infrastructure and other major projects to boost economic growth.
Tariff Shocks
Policymakers at the Bank of Canada reiterated that supply shocks caused by trade disputes have constrained their ability to take stimulus measures. Structural damage from trade disputes has reduced economic potential and increased costs, limiting the capacity of monetary policy to stimulate demand while keeping inflation low.
Macklem said that as tariffs are officially implemented and American protectionism becomes entrenched, their impact on Canada has become clearer, although the future level and scope of tariffs remain uncertain. He emphasized ongoing major uncertainties in the forecasts: "The range of possible outcomes is wider than usual; we must remain humble about our projections."
The Bank of Canada stated that as tariffs drive up business costs and increase uncertainty, investment is expected to remain subdued, mainly due to reduced U.S. demand for Canadian exports.
With no signs of resolution on U.S. tariff issues, the Bank of Canada resumed providing baseline economic forecasts in this quarter's monetary policy report, after using scenario analysis in its April and July reports to reflect trade uncertainties faced by Canada at the time.
Economic and Inflation Expectations
The Bank of Canada forecasts that the country’s economy will remain in excess supply during the forecast period. Policymakers lowered their projection for economic growth in the second half of 2025 to 0.75%. Macklem stated in his speech that by the end of 2026, Canada's economy is expected to be 1.5% smaller than projected in January.
Compared with the January forecast, the Bank of Canada lowered its economic growth projection for 2025 from 1.8% to 1.2%, and for 2026 from 1.8% to 1.1%. Growth is expected to pick up slightly to 1.6% in 2027.
Meanwhile, as population growth slows and a weak job market drags down incomes, consumption growth is also expected to slow. On a per capita basis, consumption is expected to grow by just 1% on average in 2026 and 2027.
Macklem also acknowledged that the Bank of Canada’s preferred core inflation measure has stubbornly remained around 3%, but he reiterated that upward momentum has faded and again pointed out that broader measures show underlying price pressures at about 2.5%.
Although the Bank of Canada recognizes that trade disruptions have raised costs, it also noted that inflationary impact has been lighter than previously expected because Canada has withdrawn most of its countervailing tariffs against the U.S. The bank expects inflation to remain close to the 2% target until around 2027.
Market Reaction and Analysis
After the Bank of Canada's rate decision was announced, the Canadian dollar extended its gains, climbing to 1 CAD against 1.3915 USD, the highest since October 1, marking the third consecutive day of gains. Canadian government bond yields rose across the board. Overnight swap traders reduced the probability of another rate cut in December from over 30% to about 20%.
Media analysis noted that overall, these remarks indicate that Bank of Canada officials remain reluctant to take further monetary stimulus measures to avoid fueling inflationary pressures. Policymakers expect global price increases and supply chain disruptions caused by trade disputes to continue pushing inflation higher.
Many industry insiders believe Canada could further cut rates in the future. They point out:
- Canada’s rate cut is because the economy is under tremendous pressure, which is not something to celebrate. Ongoing geopolitical uncertainty has prompted the Bank of Canada to take precautionary “insurance-style” rate actions. Canada's industrial sector is suffering from tariff blows. This is an economy that needs support. The Bank of Canada’s rate cuts may not be over.
- The decision to cut rates reflects persistent economic concerns. Although the balance of risks between inflation and growth remains unclear, policy rates need to remain low when there is substantial excess capacity in the economy. With the federal budget coming out next week, expected stimulus measures are unlikely to change this year’s monetary policy direction.
- The neutral rate may be lower than the Bank of Canada’s estimate. However, based on the Bank’s comments Wednesday, further rate cuts may have to wait until early 2026.
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