By Erik Hertzberg and Nojoud Al Mallees
(Bloomberg) — The Bank of Canada cut interest rates as it sees damage from U.S. tariffs persisting, but signalled that borrowing costs are roughly at the right place as long as its forecasts materialize.
Officials led by Governor Tiff Macklem lowered the benchmark overnight rate by 25 basis points for a second consecutive meeting on Wednesday, bringing the policy rate to 2.25%, the lowest since July 2022.
The central bank also slashed growth projections, painting a downbeat picture of the economy. In prepared remarks, Macklem called the trade conflict with the US a “structural transition” that has “diminished Canada’s economic prospects.”
But the central bank pushed back on expectations of further easing, saying it sees the policy rate “at about the right level keep inflation close to 2% while helping the economy through this period of adjustment.” That depends on inflation and economic activity evolving in line with its projections.
“If the outlook changes, we are prepared to respond,” the bank said.
The Canadian dollar extended gains after the decision, trading at $1.3915 per U.S. dollar, its strongest level since Oct. 1. It is a third day of gains for the loonie. Yields on Canadian government debt rose across the curve. Traders in overnight swaps lowered expectations for a December rate cut.
Policymakers also reiterated the supply shock posed by the trade dispute limits their ability to intervene and stimulate growth.
“The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation.”
Macklem also acknowledged that the bank’s preferred core inflation metrics were “sticky” around 3%, but reiterated “upward momentum has dissipated” and repeated the bank sees a broader suite of measures pointing to underlying price pressures around 2.5%.
The bank sees the economy in excess supply over the forecast horizon. Policymakers also cut their outlook for growth to 0.75% for the second half of 2025. In his remarks, Macklem said the bank sees the economy 1.5% smaller by the end of 2026 compared with the forecast in January.
Combined, the communications suggest the officials remain reluctant to add more monetary stimulus for fear of stoking inflationary pressures, which policymakers expect to be pushed up by rising global prices and supply chain disruptions posed by the trade dispute.
With no end to US tariffs in sight, the Bank of Canada has returned to providing a base-case economic projection in its quarterly monetary policy report after using scenario analyses in April and July to capture the trade uncertainty Canada was facing.
“With tariffs now in place and U.S. protectionism entrenched, the impact on Canada has become clearer, even as the level and scope of future tariffs remains uncertain,” Macklem said.
Still, he repeated that there was major uncertainty in the projections. “The range of possible outcomes is wider than usual — we need to be humble about our forecast,” he said.
Downgraded forecasts
Compared to its January projections, the Bank of Canada has downgraded its forecast for economic growth in 2025 to 1.2%, and in 2026 to 1.1%. Both were previously expected to be 1.8%. It projects growth to pick up modestly in 2027 to 1.6%.
As tariffs drive up costs for businesses and fuel uncertainty, investment is expected to remain weak “mainly due to reduced U.S. demand for Canadian exports,” the central bank said.
Meanwhile, consumption growth is expected to slow as Canada’s population growth stalls and a soft job market weighs on incomes. On a per-person basis, consumption is expected to increase modestly by 1% on average in 2026 and 2027.
“There’s nothing to cheer about here. We’re lowering interest rates because the economy is under immense strain,” Warren Lovely, managing director with National Bank Financial, said on BNN Bloomberg Television. There is “a continued swirl of geopolitical uncertainty and it argues for taking out some interest rate insurance here.”
“We’re suffering from a death of a thousand sectoral tariff cuts in our industrial sector. This is an economy that needs support,” he added. “The Bank of Canada might not be done.”
While the bank acknowledged that trade disruptions are driving up costs, it noted the impact on inflation is less pronounced than previously anticipated because Canada dropped most of its counter-tariffs on the U.S.
The central bank is projecting inflation will remain close to its 2% target through 2027.
At 2.25%, the overnight rate is at the bottom of the central bank’s estimate range for the neutral rate of interest rates, where borrowing costs neither stimulate nor restrict economic growth.
Macklem and Senior Deputy Governor Carolyn Rogers will speak to reporters at 10:30 a.m. Ottawa time.
–With assistance from Mario Baker Ramirez, Anya Andrianova, Melissa Shin and Derek Decloet.
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Last modified: October 29, 2025