Bank of Canada cuts policy interest rate at its October meeting

The Bank of Canada announced today that it is reducing its benchmark interest rate to 2.25% from 2.50%. This marks the second rate cut this fall and reflects the Bank’s expert interpretation of current economic data and trending conditions.

We summarize the Bank’s observations and its outlook below.

Canadian Economic Performance Amid Tariffs

• Canada’s economy contracted by 1.6% in the second quarter, reflecting a drop in exports and weak business investment amid heightened uncertainty –  even though household spending grew at a healthy pace
• U.S. 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

Canadian Labour Market

• Canada’s labour market remains soft;  employment gains in September followed two months of sizeable losses
• Job losses continue to increase 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

Canadian Inflation

• Inflation measured by the Consumer Price Index (“CPI”) 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 2.5%
• The Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over its projection horizon

Global Economic Performance

• In the United States, economic activity has been strong, supported by AI investments
• At the same time, U.S. employment growth has slowed and tariffs have started to push up U.S. 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
  

Rationale for Today’s Rate Cut

With ongoing weakness in the economy and inflation expected to remain close to the Bank’s 2% target, its Governing Council decided to cut its policy rate by 25 basis points. If inflation and economic activity evolve broadly in line with its 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.  This statement is likely to temper expectations of further rate cuts in the near term.

Return of Projections

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

Growth Outlook

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

In its MPR projection, the global economy slows from about 3.25% in 2025 to about 3% in 2026 and 2027.

Final comments

The Bank noted that 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 says it is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval and underscored that if its outlook changes, it is prepared to respond as it assesses incoming data carefully relative to its forecast.

Additionally, the Bank said that while the global economy has been resilient to the historic rise in U.S. tariffs so far, the impact is becoming more evident. Trade relationships are being reconfigured and ongoing trade tensions are dampening investment in many countries.

Next scheduled BoC rate announcement

The Bank is scheduled to make its next (and final 2025) interest rate announcement on December 10^th. First National’s executive summary will follow. In the meantime, please visit the Resources page of this website for other important insights.