(Bloomberg) – Bank of Canada lowered interest rates as the economy and labor markets showed losses from U.S. tariffs, but remained tense on future pathways for currency release.
Officials led by Gov. Tiff Macklem lowered the benchmark overnight interest rate by a quarter of a percentage point to 2.5% on Wednesday, the first cut in borrowing costs since March, as well as expectations for markets and expectations for most economists in a Bloomberg survey.
“Because the economy is weaker and the risk of rising inflation is less, the Council believes that lowering policy rates is appropriate and can better balance the risks of moving forward,” Macklem said in his prepared remarks. He said there is a “clear consensus” in cutting.
Officials pointed out that the economic pressure has continued to increase, including further easing the country’s labor market. They also said Prime Minister Mark Carney has removed retaliatory tariffs on imports of certain U.S. goods, thus eliminating a potential source of inflation.
Nevertheless, the newsletter provides little forward guidance on rates, and the statement deletes references so that further cuts that may be needed to be inserted at the July meeting.
Instead, officials said they would “do it carefully” and added: “Even if economic activity is weighed, the destructive impact of the trade shift will continue to increase costs.”
After the decision, Loonie fell to the low price of the day, with the last trade of C$1.3760 as of 9:49 a.m. in Ottawa. Canadian debt traded steadily across the curve, with a two-year yield of very little, at 2.46%.
Communications combined, show that while central banks have resumed monetary easing to increase support for the sick economy, they have lowered interest rates too quickly given the potential inflationary risks brought by global protectionism and the surge in tariffs.
Officials noted that the economy stood out in the months of July and August, saying they were “mostly” concentrated in trade-sensitive sectors. They said the evidence they saw slowed down, and the rest of the economy slowed down, and were marked as unemployment rose to 7.1%.
Canada’s economy fell 1.6% in the second quarter, roughly in line with bank expectations. The contraction was driven by a decline in export activity and commercial investment, and the bank said U.S. taxation and trade uncertainty “seriously affect economic activity.”
Banks say consumption and housing are growing “at a healthy rate,” but it warns that slow population growth and weak labor markets may weigh on household spending.
“The tariffs have had a profound impact on several key sectors, including automotive, steel and aluminum,” Macklem said in a statement.
Policymakers downplayed the still-core inflation pressure that is still at the core, saying the upward momentum of the bank’s preferred decoration and median measures has “dissipated”. These meters are edited nearly 3% each year, but the bank says it has a base pressure of nearly 2.5%. The bank said wage pressure continues to ease.
“Recent data suggest that the upward pressure on potential inflation has decreased,” Macklem said.
The central bank reiterates that its focus is on the way of exporting amid U.S. tariff threats and how damage spreads to investment, employment and household spending.
Macklem said the bank believed U.S. tariffs were somewhat stable in recent weeks, adding: “The uncertainty may drop in the near future,” although the upcoming renegotiation of a trade agreement between Canada and Mexico is becoming the focus.
Officials said they are also watching how tariff disruptions and supply chain transfers will drip into consumers and their expectations for inflation.
Policymakers did not mention the money pressure in the money market in their newsletter, where Canada’s average overnight repurchase rate (or Cora) exceeded 5 basis points of Canadian banks’ overnight interest rates for most of September. Officials set the deposit rate at 2.45%, still 5 basis points lower than the policy rate.
Macklem and Senior Lieutenant Governor Carolyn Rogers will speak to reporters at 10:30 a.m. Ottawa time.
– With the assistance of Mario Baker Ramirez and Carter Johnson.
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Last modified: September 17, 2025
