The Bank of Canada cut its benchmark interest rate by a quarter-point, bringing it down to 2.5 per cent after three straight holds. Governor Tiff Macklem said the bank would 'look over a shorter horizon than usual.'
The Canadian Press
The Bank of Canada and the U.S. Federal Reserve resumed interest rate cuts on Wednesday, kicking off a new round of monetary policy easing amid a slowdown in the job market in both countries and unrelenting political pressure on the Fed to lower borrowing costs.
Both central banks had been on pause for months, waiting to see how U.S. President Donald Trump’s disruptive trade policies would affect inflation and economic activity. The BoC last cut in March while the Fed has been on hold since December.
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Both central banks said Wednesday they were resuming rate cuts in response to weakening employment and signs that inflation is becoming less of a concern.
However, they sent different signals about where interest rates will go from here, reflecting divergent starting points, trajectories for economic growth, and challenges navigating a world upended by Mr. Trump.
The Bank of Canada lowered its policy rate by a quarter-point to 2.5 per cent but refrained from providing guidance about additional rate cuts. Bank of Canada Governor Tiff Macklem said only that the bank would proceed “carefully” and “look over a shorter horizon than usual.”
The Fed followed up on Wednesday afternoon with its own quarter-point rate cut, which took the target range for the federal funds rate down to 4 per cent to 4.25 per cent.
It also published a new summary of economic projections, which showed that the majority of the Fed’s top officials now expect two more rate cuts this year, in October and December, with more to follow next year.
The Fed decision took place against the backdrop of unprecedented political pressure from the White House. Mr. Trump has spent months lambasting Fed Chair Jerome Powell for not cutting interest rates. And he has moved aggressively to overhaul the Fed’s voting committee, appointing ally Stephen Miran as an interim Governor and trying to fire Governor Lisa Cook.
In a first for the central bank, Mr. Miran has remained an economic adviser to the Trump administration even as he joined the Fed board of governors this week. He was the one dissenting vote on the 12-person voting committee who called for a larger half-point rate cut.
At a press conference following the rate announcement, Mr. Powell dodged questions about the attacks on the Fed’s independence. He said that the decision to resume rate cuts wasn’t influenced by politics. It was driven, he said, by a slowdown in job creation over the summer, which has made the Fed focus more on the full-employment side of its dual mandate.
“I think we were right to wait and see how tariffs and inflation and the labour market evolved,” Mr. Powell told reporters. “I think we’re now reacting to the much lower level of job creation and other evidence of softening in the labour market and saying, well those risks are maybe not fully balanced, but moving in the direction of balance now, and so that warrants a change in policy.”
Federal Reserve Chair Jerome Powell speaks to reporters in Washington on Wednesday after the rate cut announcement.Elizabeth Frantz/Reuters
At 2.9 per cent in August, U.S. inflation remains above the Fed’s target, and economists expect price pressures to continue in the coming months as companies pass tariff costs along to customers. But Mr. Powell played down the risk, arguing that the price shock from tariffs was likely to be short-lived.
Financial markets see-sawed as the Fed laid out its case for a pivot. The S&P 500 jumped after the rate-cut announcement, then fell around a percentage point during Mr. Powell’s press conference, before rebounding and finishing the trading day essentially flat. U.S. Treasury yields initially fell but finished the day slightly higher.
In Ottawa, Mr. Macklem made a similar case for a cut as Mr. Powell.
“Considerable uncertainty remains. But with a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks going forward,” Mr. Macklem said at a press conference after the rate announcement.
While U.S. economic growth has held up fairly well through 2025, the picture is considerably worse in Canada.
Mr. Trump’s tariffs have hammered Canadian exports, which fell 27 per cent in the second quarter as tariff front-running went into reverse and U.S. demand dropped. That drove a 1.6-per-cent annualized contraction in Canadian real gross domestic product in the second quarter.
“Tariffs are having a profound effect on several key sectors, including the auto, steel and aluminum industries. Chinese tariffs on canola, pork and seafood, new U.S. tariffs on copper, and higher U.S. tariffs on softwood lumber will spread the direct impacts further,” Mr. Macklem said.
The labour market weakened significantly over the summer, particularly in tariff-exposed industries and among young people. The unemployment rate hit 7.1 per cent in August, the highest level since 2016 outside the pandemic.
Business investment is likewise weak. And while consumer spending has held up fairly well, Mr. Macklem warned that slow population growth and rising unemployment will likely weigh on household spending in the coming months.
The BoC’s reluctance to lower interest rates through much of 2025 was based on concerns about sticky core inflation measures, which have remained stubbornly above the bank’s 2-per-cent target. It was also nervous that tariffs and supply-chain disruptions would add to inflation even as they hurt economic activity.
These worries appear to be fading. Although core inflation measures remain around 3 per cent, underlying inflation is running closer to 2.5 per cent, Mr. Macklem said, and “the upward pressures on underlying inflation have diminished.”
Prime Minister Mark Carney’s decision in August to drop retaliatory tariffs on more than $40-billion worth of U.S. goods – products that comply with continental free-trade agreement rules of origin – also means there will be less upward pressure on imported goods prices, Mr. Macklem said.
Financial markets now put the odds of another quarter-point rate cut from the Bank of Canada in October at around 40 per cent, according to LSEG data. Only one more rate cut is fully priced in over the next year.
A lot will depend on what happens on the trade front. So far, Mr. Carney has failed to secure a deal with Mr. Trump that would remove or lower tariffs. He has said he is now trying to secure “small” sectoral deals that would lower tariffs on steel, aluminum, autos and lumber, rather than a grand bargain that would deal with all tariffs.
The government is also shifting focus to the upcoming review of the United States-Mexico-Canada Agreement, the free-trade pact that is currently protecting around 85 per cent of Canadian exports to the U.S. from tariffs.
“We are paying close attention to how exports evolve given the impact of U.S. tariffs and changing trade relationships; how much this spills over into business investment, employment and household spending; how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices; and how inflation expectations evolve,” Mr. Macklem said.