The Bank of Canada has lowered its benchmark interest rate by a quarter percentage point, citing a weakening economy and fading inflationary pressures as key reasons for the move. The central bank’s policy rate now stands at 2.5%, breaking a string of three straight holds since March.
Governor Tiff Macklem said that risks to Canada’s economy have shifted since the bank’s last decision in July. “Cracks in the labour market and a sharp drop in exports are threatening growth, while earlier signs of persistent inflation are fading,” Macklem told reporters.
“With a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks,” he said.
Canada’s jobless rate has risen to 7.1%, and the economy contracted in the second quarter under the weight of U.S. tariffs. The federal government’s decision to roll back most retaliatory tariffs earlier this month is expected to lower food prices and ease inflationary pressures further.
Macklem stressed that the central bank is not forecasting a recession, but warned Canadians to expect slow growth — roughly 1% over the second half of 2025. “It’s growth, but it’s slow growth. It’s not going to feel good,” he said.
Economists were largely expecting a cut, though some questioned the timing. RBC’s Nathan Janzen said the move was a “close call,” arguing that strong consumer spending could reignite inflation. He suggested fiscal policy, not monetary stimulus, might be the better tool to offset sector-specific pain from U.S. tariffs.
Financial markets are now pricing in a 40% chance of another rate cut at the Bank’s next meeting on October 29, with some economists predicting at least one more reduction before year’s end.
Macklem emphasized the Bank’s readiness to adjust again if necessary. “If the risks tilt further, we are prepared to take more action. But we’re going to take it one meeting at a time.”
The next decision will come just ahead of Finance Minister François-Philippe Champagne’s long-awaited fall budget, which Macklem said would be factored into future forecasts but was not a deciding factor this time.
CIBC senior economist Katherine Judge said the latest data suggests the economy is “losing resilience” and sees room for another rate cut next month.
For Canadians with mortgages or loans, the rate cut offers some relief — though analysts note that at 2.5%, the policy rate remains within the Bank’s neutral range, meaning it’s still more of a cautious easing than aggressive stimulus.