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Bank of Canada Cuts Policy Rate as Economy Continues to Adapt to Trade Shock

Canadian Economics

By: Walter Bolduc

    

The Bank of Canada reduced its target for the overnight rate by 25 basis points to 2.25 per cent; the Bank Rate is 2.5 per cent and the deposit rate is 2.20 per cent.

  • The Bank of Canada cut its policy rate by 25 basis points to 2.25 per cent, citing ongoing economic weakness and easing inflationary pressures.
  • Canada’s economy contracted by an annualized 1.6 per cent in the second quarter, driven by falling exports and weak business investment amid trade uncertainty.
  • GDP growth is expected to remain weak in the second half of 2025, with modest support from consumer and government spending and residential investment.
  • Employment gains in September followed two months of losses, but hiring remains weak and job losses have continued in trade-sensitive sectors.
  • The unemployment rate held at 7.1 per cent in September, and wage growth has slowed.
  • CPI inflation was 2.4 per cent in September, slightly above expectations. Excluding taxes, inflation was 2.9 per cent.
  • Core inflation measures remain sticky around 3 per cent, though broader indicators suggest underlying inflation is closer to 2.5 per cent.
  • The Bank expects inflationary pressures to ease and CPI inflation to remain near 2 per cent over the projection horizon.
  • Global growth is slowing, with trade tensions dampening investment and reconfiguring supply chains.
  • The Bank emphasized that structural damage from trade conflict limits the role of monetary policy but reaffirmed its commitment to price stability.
  • The Bank signaled that the current policy rate is likely at the right level, provided the economy evolves in line with its new, weaker forecast.

Key insights

The Bank’s October rate cut reflects the growing realization that trade disruptions are not just cyclical, they’re structural. Sectors like autos, steel, and lumber have suffered sustained damage in 2025, which limits the effectiveness of monetary policy in stimulating demand. According to our latest Canada 5-year Outlook, many firms are taking a wait-and-see approach when it comes to investment spending. Another quarter point cut to the Bank’s key policy rate will not change this sentiment.

Headline CPI inflation came in at 2.4 per cent in September, slightly above expectations, while core inflation measures remain near 3 per cent. However, broader indicators suggest underlying inflation is closer to 2.5 per cent and trending downward. Despite this, the Bank expects inflation to stay near its 2 per cent target moving forward. According to Statistics Canada, the distribution of price changes across CPI components shows a narrowing range, indicating reduced volatility and easing pressure.

Canada’s labour market remains fragile. With slower population growth, fewer new jobs are needed to maintain employment rates, but the underlying slack remains. The Bank’s rate cut is a preemptive move to support demand and prevent further deterioration.

For more details about our trade forecast and inflation’s impact on the Canadian economy, please consult our Canadian Five-Year Outlook.

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