The Bank of Canada lowered its key interest rate to 2.25 per cent on Wednesday, a 25-basis-point cut aimed at supporting a slowing economy — but signalled it may now pause its rate-cutting cycle.
Governor Tiff Macklem said the central bank’s decision reflects ongoing weakness in growth and investment, but stressed that monetary policy cannot fix the structural damage caused by the U.S. trade war.
“Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income,” Macklem said. “Monetary policy can help the economy adjust, but it cannot restore it to its pre-tariff path.”
The central bank’s latest Monetary Policy Report warns that the trade conflict is “fundamentally reshaping” Canada’s economy, pushing down exports and business investment. GDP contracted in the second quarter as trade uncertainty hurt key sectors including autos, steel, aluminum, and lumber.
While consumer spending and housing remain bright spots, the labour market has weakened, with job losses mounting in tariff-sensitive industries.
The Bank expects inflation to remain near its 2% target, with weak demand offsetting tariff-related price pressures.
“If inflation evolves broadly in line with our expectations, we’ll hold rates where they are,” Macklem said. “But if the outlook changes, we’re prepared to respond.”
Economists had widely anticipated another rate cut, though many see Wednesday’s move as the end of the easing cycle — at least for now.
Robert Kavcic, senior economist at BMO, said the Bank appears confident the current level of stimulus is sufficient.
“The Bank believes recent easing will offer support and inflation is on track,” he wrote. “But softness in the job market leaves the door open for another 25-basis-point cut in early 2026.”
For now, Macklem says the central bank will stay data-dependent — and patient.
“It’s not one month of data that changes your view,” he said. “You need an accumulation of evidence that truly shifts the outlook.”
With that, Canada’s rate path enters a cautious holding pattern as policymakers balance weak growth, stable inflation, and the lingering economic fallout of global trade tensions.
