Bank of Canada cuts key rate to 2.25% as trade tensions hit economic growth

“The economy contracted by 1.6% in the second quarter, reflecting a drop in exports and weak business investment amid heightened uncertainty,” the Bank stated in the accompanying press release (1).

Global slowdown and trade shock

The Bank noted that while the global economy had been resilient to rising U.S. tariffs, the impact of protectionist trade policies is “becoming more evident.” Now, as the year approaches an end, the BoC is projecting global growth to slow from 3.25% in 2025 to about 3% in 2026 and 2027.

In the U.S., strong economic activity driven by artificial intelligence (AI) investment has been offset by higher prices from tariffs and slower job growth. Europe and China are also facing sluggish demand and weakened investment. The uncertainty has dampened business confidence worldwide, weighing on Canadian exports and private investment.

Domestic weakness and labour softening

At home, Canada’s labour market remains soft, with an unemployment rate of 7.1% in September and wage growth slowing. Job losses are mounting in trade-sensitive industries, and overall hiring remains weak. Meanwhile, household spending has been one of the few bright spots, supported by consumer and government spending.

The Bank now forecasts GDP growth of 1.2% in 2025, 1.1% in 2026, and 1.6% in 2027 — well below potential, according to BoC Governor, Tiff Macklem. In the press conference after the announcement, Macklem made it clear that this slow growth is now structural and, aside from structural economic changes, will continue to drag down Canada's economic growth and, as a result, additional upside to job and wage growth. He also emphasized that excess capacity in the economy is expected to persist this year and through to 2026.

Inflation near target, but pressures easing

Despite the slowdown, inflation remains close to the 2% target. CPI inflation was 2.4% in September, with core inflation measures “sticky around 3%,” the BoC stated (2). However, it expects those pressures to ease as growth remains subdued.

“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,” the Bank explained. It described the new level as “about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment.”

Balancing risks amid structural change

The Bank acknowledged that the trade conflict has permanently reduced Canada’s economic capacity. “This limits the role that monetary policy can play to boost demand while maintaining low inflation,” it said, emphasizing its focus on maintaining public confidence in price stability.

The next rate decision is scheduled for December 10, 2025, with a full economic update due in January 2026.

What does lowering the target rate do?

Macklem explained that lowering the target rate doesn't fix all the economic issues facing Canadians; however, he did emphasize that the lowered rate does support consumption growth, which can support wage and job growth and certainty.

Article sources

Bank of Canada (1, 2)