By Erik Hertzberg and Randy Thanthong-Knight
(Bloomberg) — The Bank of Canada cut interest rates as the economy and labour market show damage from U.S. tariffs, but kept tight-lipped on any future path for monetary easing.
Officials led by Governor Tiff Macklem cut the benchmark overnight rate by a quarter percentage point to 2.5% on Wednesday, the first reduction in borrowing costs since March and matching expectations of markets and the majority of economists in a Bloomberg survey.
“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 going forward,” Macklem said in prepared remarks. There was “clear consensus” for the cut, he said.
Officials pointed to mounting economic pressures, including a further softening of the country’s labour market. They also said Prime Minister Mark Carney’s removal of retaliatory tariffs on imports of some US goods had eliminated one potential source of inflation.
Still, the communications offered little in terms of forward guidance on rates, and the statement removed a reference for a possible need for further cuts that it had inserted at its July meeting.
Instead, officials said they would be “proceeding carefully,” adding that “the disruptive effects of shifts in trade will continue to add to costs even as they weigh on economic activity.”
The loonie fell to the day’s low against the US dollar after the decision and last traded around C$1.3763 as of 10:04 a.m. in Ottawa. Canadian debt traded steadily across the curve, with the two-year yield little changed at 2.46%.
Traders in overnight swaps continue to fully price another cut from the central bank this cycle, and put the odds at about a coin flip they’ll ease again in October.
Combined, the communications suggest that while the central bank has resumed monetary easing to add support to the ailing economy, they’re leery of cutting interest rates too quickly given the potential inflation risks posed by the surge in global protectionism and tariffs.
Officials noted the more than 106,000 jobs the economy shed in the months of July and August, saying they were “largely” concentrated in trade-sensitive sectors. They said they’re seeing evidence hiring has slowed in the rest of the economy too, and flagged the unemployment rate has risen to 7.1%.
Canada’s economy shrank at a 1.6% annualized pace in the second quarter, which was roughly in line with the bank’s expectations. The contraction was driven by a drop in export activity and business investment, and the bank said U.S. levies and trade uncertainty were “weighing heavily on economic activity.”
While the bank said consumption and housing grew “at a healthy pace,” it cautioned slow population growth and labour market weakness would likely weigh on household spending.
“Tariffs are having a profound effect on several key sectors, including the auto, steel and aluminum sector,” Macklem said in his statement.
Looking Forward
Policymakers downplayed still-elevated core inflation pressures, saying the upward momentum in the bank’s preferred trim and median measures had “dissipated.” Those gauges are running near a 3% yearly clip, but the bank says it sees broader underlying pressures closer to 2.5%. Wage pressures have continued to ease, the bank said.
“Recent data suggest the upward pressures on underlying inflation have diminished,” Macklem said.
The central bank reiterated that it was focused on how exports evolve amid the U.S. tariff threat, and how damage may spread into investment, employment and household spending. Officials say they’re also watching how tariff disruptions and shifting supply chains will trickle through to consumers and their expectations of inflation.
“In our view, the economy is losing resilience and inflation will continue to be contained by the elevated unemployment rate and removal of retaliatory tariffs and we therefore see another 25 basis-point cut in October,” Katherine Judge, economist at Canadian Imperial Bank of Commerce, said in a report to investors.
What Bloomberg Economics Says…
“We’ve long expected the overnight rate target to end the year at 2.25% — and that’s still our base case following the BoC’s dovish announcement.”
—Stuart Paul, U.S. and Canada economist
The policy rate is now below the midpoint of the bank’s 2.25% to 3.25% neutral range estimate for the first time since the opening stages of the pandemic, pointed out Stephen Brown, deputy chief North America economist at Capital Economics.
“The relatively neutral tone of the bank’s policy statement suggests that it is not necessarily expecting to cut rates again in October,” he told investors in a note.
Macklem said the bank sees some stability in U.S. tariffs in recent weeks, adding that “near-term uncertainty may have come down a bit,” though the upcoming renegotiation of the trade agreement between U.S., Canada and Mexico is becoming a focus.
In their communications, policymakers made no mention of the funding pressures in money markets, where the Canadian Overnight Repo Rate Average, or Corra, has settled about 5 basis points above the Bank of Canada’s overnight rate for most of September. Officials set the deposit rate at 2.45%, still 5 basis points below the policy rate.
Macklem and Senior Deputy Governor Carolyn Rogers will speak to reporters at 10:30 a.m. Ottawa time.
–With assistance from Mario Baker Ramirez and Carter Johnson.
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Last modified: September 17, 2025