Bank of Canada signals it’s done trimming interest rates for now, after delivering second consecutive cut to its policy rate.

The Bank of Canada (BoC) reduced its benchmark interest rate for a second consecutive meeting on Wednesday but also signalled its rate-cutting cycle may be over, calling the current level “about right” to keep inflation in check and help the economy adjust to a slower growth path.

The quarter-point cut brought the policy rate down to 2.25 per cent, its lowest since mid-2022. Analysts view the BoC’s tone as an effort to balance support for a weak economy with its desire to avoid reigniting price pressures.

“If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy through this period of structural adjustment,” the BoC’s release about the decision said.

Markets and economists point to that line as a signal the easing cycle is over, with BMO economist Robert Kavcic writing “that’s likely it, for now.” Government bond yields edged up and the Canadian dollar bounced higher as traders priced out expectations for more rate cuts in the months ahead.

The Bank of Canada today reduced its target for the overnight rate by 25 basis points to 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

With the effects of US trade actions on economic growth and inflation somewhat clearer, the Bank has returned to its usual practice of providing a projection for the global and Canadian economies in this Monetary Policy Report (MPR). Because US trade policy remains unpredictable and uncertainty is still higher than normal, this projection is subject to a wider-than-usual range of risks.

While the global economy has been resilient to the historic rise in US tariffs, the impact is becoming more evident. Trade relationships are being reconfigured and ongoing trade tensions are dampening investment in many countries. In the MPR projection, the global economy slows from about 3¼% in 2025 to about 3% in 2026 and 2027.

In the United States, economic activity has been strong, supported by the boom in AI investment. At the same time, employment growth has slowed and tariffs have started to push up consumer prices. Growth in the euro area is decelerating due to weaker exports and slowing domestic demand. In China, lower exports to the United States have been offset by higher exports to other countries, but business investment has weakened.  Global financial conditions have eased further since July and oil prices have been fairly stable. The Canadian dollar has depreciated slightly against the US dollar.

Canada’s economy contracted by 1.6% in the second quarter, reflecting a drop in exports and weak business investment amid heightened uncertainty. Meanwhile, household spending grew at a healthy pace. US trade actions and related uncertainty are having severe effects on targeted sectors including autos, steel, aluminum, and lumber. As a result, GDP growth is expected to be weak in the second half of the year. Growth will get some support from rising consumer and government spending and residential investment, and then pick up gradually as exports and business investment begin to recover.

Canada’s labour market remains soft. Employment gains in September followed two months of sizeable losses. Job losses continue to build in trade-sensitive sectors and hiring has been weak across the economy. The unemployment rate remained at 7.1% in September and wage growth has slowed. Slower population growth means fewer new jobs are needed to keep the employment rate steady.

The Bank projects GDP will grow by 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027. On a quarterly basis, growth strengthens in 2026 after a weak second half of this year. Excess capacity in the economy is expected to persist and be taken up gradually.

CPI inflation was 2.4% in September, slightly higher than the Bank had anticipated. Inflation excluding taxes was 2.9%. The Bank’s preferred measures of core inflation have been sticky around 3%. Expanding the range of indicators to include alternative measures of core inflation and the distribution of price changes among CPI components suggests underlying inflation remains around 2½%. The Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon.

With ongoing weakness in the economy and inflation expected to remain close to the 2% target, Governing Council decided to cut the policy rate by 25 basis points. If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. If the outlook changes, we are prepared to respond. Governing Council will be assessing incoming data carefully relative to the Bank’s forecast.

The Canadian economy faces a difficult transition. 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. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.

Governor Tiff Macklem at the Bank of Canada spoke shortly after making the announcement on how the central bank reached Wednesday’s decisions and the state of the Canadian economy going forward.

Macklem said there will be some limited but “modest” growth for the economy over the next few months and into 2026 that is “not going to feel very good.”

He suggested a severe recession is unlikely.

“What we’re not forecasting is a sharp downdraft in the Canadian economy with a big rise in the unemployment rate, which is what is typical of recessions,” said Macklem speaking to reporters Wednesday.

“If you’re just looking at the quarterly growth profile, our own forecast is positive but very modest in the near term and then picking up.”

Bank of Canada lowers interest rate to 2.25%

Macklem also spoke about how although there may now be a clearer picture of where the economy is heading with “modest growth” over the next few months, they are staying cautious when it comes to the U.S. administration.

“The economy is always evolving. There is a lot of uncertainty out there. And if we needed a reminder over the last weekend, we got one with President Trump’s most recent comments. There’s a lot of uncertainty about U.S. trade policy,” said Macklem.

“There’s still a fair amount of uncertainty about what is the impact of U.S. tariffs on the Canadian economy. How does the structural change play out? So what all that means is, yes, we’ve published an outlook today, but there is a wider than usual range of outcomes around that outlook.”