Author: Erik Hertzberg and Nojoud Al Mallees
(Bloomberg) — The Bank of Canada cut interest rates as it sees the damage from U.S. tariffs lingering, but said borrowing costs will be roughly at the right level as long as its forecasts come true.
On Wednesday, officials led by Governor Tiff Macklem cut the benchmark overnight rate by 25 basis points for the second consecutive meeting, taking the policy rate to 2.25%, the lowest level since July 2022.
The central bank also slashed its growth forecasts, painting a pessimistic picture of the economy. In prepared remarks, McCallum called the trade conflict with the United States a “structural transformation” that “weakens Canada’s economic prospects.”
But the central bank hit back at expectations of further easing, saying it believed the policy rate was “at an appropriate level to keep inflation near 2% while helping the economy through this period of adjustment.” That depends on whether inflation and economic activity live up to its forecasts.
“If the outlook changes, we are prepared to respond,” the bank said.
After the decision was announced, the Canadian dollar continued its gains, trading at 1.3915 US dollars per dollar, its highest level since October 1. This is the third consecutive day of gains for the Canadian dollar. Canadian government debt yields rose across the board. Overnight swap traders lowered expectations for a December rate cut.
Policymakers also reiterated that supply shocks from the trade dispute limit their ability to intervene and stimulate growth.
“The structural damage caused by the trade conflict reduces economic capacity and increases costs. This limits the role of monetary policy in stimulating demand while maintaining low inflation.”
Macklem also acknowledged that the bank’s preferred core inflation measure was “sticky” at around 3%, but reiterated that “upward momentum has dissipated” and reiterated that the bank believes a broader set of indicators point to underlying price pressures at around 2.5%.
The bank sees the economy as oversupplied over the forecast horizon. Policymakers also lowered their growth forecast for the second half of 2025 to 0.75%. In his speech, McCallum said the bank expects the economy to shrink by 1.5% by the end of 2026 compared with its January forecast.
Taken together, the communications suggest officials remain reluctant to add more monetary stimulus for fear of exacerbating inflationary pressures that policymakers expect to rise from higher global prices and supply chain disruptions from the trade dispute.
With no end in sight for U.S. tariffs, the Bank of Canada re-delivered its base-case economic forecast in its quarterly monetary policy report after using scenario analysis in April and July to capture the trade uncertainty facing Canada.
“As tariffs are implemented and U.S. protectionism solidifies, the impact on Canada becomes more apparent, although the level and scope of future tariffs remains uncertain,” McCollum said.
However, he reiterated that there is significant uncertainty in the forecast. “The range of possible outcomes is wider than usual – we need to be modest in our forecasts,” he said.
Downgrade forecast
Compared with its January forecast, the Bank of Canada lowered its economic growth forecast to 1.2% in 2025 and 1.1% in 2026. Both had been expected to be 1.8%. Growth is expected to rebound slightly to 1.6% in 2027.
The central bank said investment is expected to remain weak “mainly due to reduced U.S. demand for Canadian exports” as tariffs push up business costs and heighten uncertainty.
At the same time, consumption growth is expected to slow as Canada’s stagnant population growth and a weak job market weigh on incomes. On a per capita basis, consumption is expected to grow slightly by an average of 1% in 2026 and 2027.
“There’s nothing to cheer about here. We’re lowering rates because the economy is under tremendous pressure,” Warren Lovely, managing director at National Bank Financial, said on BNN Bloomberg Television. “Geopolitical uncertainty continues, so there’s a need to buy some rate insurance here.”
“Our industrial sector is being hit by a thousand sectoral tariff cuts. This is an economy that needs support,” he added. “The Bank of Canada probably won’t do that.”
While the bank acknowledged that trade disruptions were driving up costs, it noted that the impact on inflation was less pronounced than previously expected as Canada removed most of its retaliatory tariffs against the United States.
The central bank expects inflation to remain close to its 2% target through 2027.
The overnight interest rate of 2.25% is at the bottom of the central bank’s estimated neutral interest rate range, and borrowing costs will neither stimulate nor constrain economic growth.
McCallum and Senior Deputy Premier Caroline 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
