The Bank of Canada building in Ottawa. The central bank cut its key interest rate again on Wednesday, as widely expected, and suggested it might be the last rate cut for a while.Adrian Wyld/The Canadian Press
The Bank of Canada cut its benchmark interest rate on Wednesday but signalled that it might be at the end of its easing cycle even as U.S. tariffs inflict significant and lasting damage on the Canadian economy.
The bank’s governing council voted to lower the policy rate by a quarter-percentage-point to 2.25 per cent. This was the second consecutive cut, and the fourth cut this year.
The bank also slashed its forecast for economic growth and warned that the Canadian economy is going through a “structural transition” caused by U.S. President Donald Trump’s protectionism, which could leave Canadians with a permanently lower standard of living.
Governor Tiff Macklem said in a news conference after the rate announcement that the policy rate was now “at about the right level to keep inflation close to 2 per cent while helping the economy through this period of structural adjustment.” Although he added that the bank could come off the sidelines if there is a “material” change in the outlook.
This seems to mark the end of an easing cycle that began in the summer of 2024 and that saw the bank lower borrowing costs nine times.
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It also highlights what Mr. Macklem and his colleagues believe are the limits of monetary policy in dealing with an unprecedented trade shock that is changing the very structure of the Canadian economy.
In effect, Mr. Macklem is handing the baton off to his former boss, Prime Minister Mark Carney, ahead of the much-anticipated federal budget next week. Mr. Carney has suggested Ottawa will run a sizeable deficit this year in order to invest in infrastructure, defence and housing, alongside other measures to stimulate economic growth.
“Monetary policy… can’t target the hard-hit sectors: aluminum, steel and autos. It can’t help companies find new markets. It can’t help companies reconfigure their supply chains,” Mr. Macklem said.
“What it can do is it can try to mitigate the spillovers from the hard-hit sectors to the rest of the economy. And it can try and help the economy adjust to this structural change. But its role is limited, because this is more than a cyclical downturn, it’s a structural change. There are added costs. That limits how much we can boost demand and keep inflation well controlled.”
U.S. tariffs have already had a major impact on the Canadian economy, which contracted sharply in the second quarter as exports plunged. So far, job losses are concentrated in the industries that have been hit by sector-specific tariffs – steel, aluminum, automobiles and forest products – but businesses across the country are holding off hiring and investment given the trade uncertainty.
The bank now estimates that Canada’s gross domestic product will be about 1.5 percentage points smaller by the end of next year than it would have been without the trade war.
In a new baseline forecast – the first one since January – the bank sees GDP growing by around 0.75 per cent in the second half of the year, then rising slightly to 1.1 per cent in 2026 and 1.6 per cent in 2027. This tepid growth is the result of trade tensions and a sharp slowdown in population growth stemming from Ottawa’s new immigration targets.
“The reality is open trading to the United States has benefited both our countries for many years now. It allows for a more efficient allocation of production. It allows us to specialize in the production of certain goods, export those, import goods from the United States that they specialized in... Increased trade friction with the United States means all that works less efficiently,” Mr. Macklem said.
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Unless Canadian governments and businesses can find some way to offset this shock by improving productivity, “our standard of living as a country, Canadians, is going to be lower than it otherwise would have been,” he said.
When it comes to inflation, the bank appeared less concerned than it has been for some time.
Trade disruptions continue to push up costs for businesses, but companies are having a tough time passing these costs along to customers, given weak demand. Ottawa’s removal of most countertariffs against the U.S. in September will reduce price pressures coming from imported goods.
Annual Consumer Price Index inflation was 2.4 per cent in September, with core inflation measures running around 3 per cent – the top end of the bank’s inflation-control band. But upward momentum in inflation “has dissipated,” Mr. Macklem said, and “the bank expects inflationary pressures to ease in the months ahead.”
The Governor acknowledged that the outlooks for economic growth and inflation remain cloudy, given how much rests on the whims of Mr. Trump.
Trade talks between Ottawa and Washington, for example, broke down last week after the President became angry about a television advertisement made by the Government of Ontario that featured the late U.S. president Ronald Reagan criticizing protectionism.
The future of the continental free trade agreement (the USMCA or CUSMA, depending on which country’s acronym you use) is in question. The trilateral deal is up for review next year, but Mr. Trump has said he might pursue bilateral deals with Canada and Mexico instead.
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“On our base case assumptions that the economy starts to gradually recover, and that a trade deal is reached to lower some sectoral tariffs and reduce uncertainty surrounding CUSMA, today’s move would be the final one,” Andrew Grantham, senior economist at Canadian Imperial Bank of Commerce, wrote in a note to clients.
“However, further cuts would certainly be justified if the economy continues to weaken and/or if the outlook for trade doesn’t improve,” Mr. Grantham wrote.
Following the announcement, financial markets put the odds of another rate cut in December at less than 10 per cent, with no additional cuts priced in next year, according to LSEG data.
Several hours after the Bank of Canada decision, the U.S. Federal Reserve followed suit with its own quarter-point interest rate cut, bringing the target range for the federal funds rate down to 3.75 per cent to 4 per cent.
The cut was widely anticipated, but analysts and investors were watching for signals about where the Fed goes from here. U.S. central bankers are weighing a weakening labour market against the risk of tariff-induced inflation.
Fed Chair Jerome Powell sent stock markets skidding lower with the suggestion that another cut in December was “far from” a foregone conclusion.