The Bank of Canada lowered interest rates to 2.25 per cent on Wednesday, but cautioned that monetary policy can’t fix the structural economic damage caused by the U.S. trade war.
The central bank said it made the 25-basis-point cut as weakness ripples through the Canadian economy and with inflation expected to stay close to the bank’s two per cent target.
“For many months, we have been stressing that monetary policy cannot undo the damage caused by tariffs,” said Bank of Canada governor Tiff Macklem in his opening statement.
“Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income. Monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path.”
Macklem also indicated that if inflation evolves broadly in line with the bank’s current expectations — hovering around the two per cent target — it will hold rates at their current level.
However, if the outlook changes, “we are prepared to respond,” he added.
The central bank release its Monetary Policy Report alongside its interest rate announcement on Wednesday, warning that the trade conflict is “fundamentally reshaping” Canada’s economy.
The bank outlined some of the economic conditions that influenced its decision to lower rates.
First, Canada’s economy shrank in the second quarter as exports dropped and businesses made fewer investments because of trade-related uncertainty.
The labour market is still showing weakness and hiring has slowed, with thousands of job losses in industries vulnerable to the U.S. trade war.
U.S. has ‘swerved to protectionism,’ Bank of Canada governor says
And because the trade conflict is having “severe effects” on tariff-hit sectors like autos, steel, aluminum and lumber, GDP growth is expected to be weak in the second half of the year, the bank said.
Responding to a question about whether the bank thinks Canada will avoid a recession in 2025, Macklem said that the central bank continues to expect modest growth.
But he emphasized that whether the economy sees a slight pickup or a few quarters of negative growth, Canadians are “not going to feel very good” in either scenario.
Still, consumer spending has grown at a “healthy pace” and is expected to continue growing into the end of the year alongside real estate investment and government spending, according to the bank.
Bank officials expect inflation to stay close to its target in the coming months and that inflationary pressures will ease as well.
While weak economic growth is keeping price increases subdued, tariff-related costs for businesses are putting pressure on inflation, and the bank expects these two forces will offset each other.
The bank said in its release that if inflation and economic growth evolve “broadly in line” with its current projections, it considers the current rate “at about the right level” to keep inflation on target while guiding the economy through a period of change.
If the outlook changes, the bank could change course. Asked what kind of material change the central bank would need to see, Macklem quipped, “I’ll tell you when we see one.”
“It’s not one month of data that shows some shift,” he added. “You need to see some accumulation of evidence that you’re coming in below that forecast … enough that it actually changes your outlook of the future.”
Even as the bank indicates that it could be done lowering rates for now, some economists still expect more cuts down the line.
“The Bank appears to believe that the easing to date will offer support; inflation is steadily on its way back to 2 [per cent]; and the usefulness of monetary policy is somewhat limited in this unique economic environment,” wrote Robert Kavcic, a senior economist at BMO.
“That said, we believe that ongoing softness in the job market leaves the door open for some further support, and another 25 [basis point] rate is still on the table for early-2026.”
The Bank of Canada will announce its next interest rate decision on Dec. 10.
