Bank of Canada Cuts Policy Rate to 2.25% Amid Slow Growth and Cooling Inflation

The Bank of Canada has reduced its overnight lending rate by 25 basis points to 2.25%, setting the Bank Rate at 2.5% and the deposit rate at 2.2%.

In its latest Monetary Policy Report (MPR), the central bank said it now has a clearer understanding of how U.S. trade measures are affecting growth and inflation, allowing it to resume formal forecasts for both the global and Canadian economies. However, because U.S. trade policy remains unpredictable, the Bank warned that the projection carries greater-than-usual uncertainty.

According to the report, the global economy has remained resilient despite historic U.S. tariff increases, though the drag is becoming more visible. Trade patterns are being reshaped, and persistent tensions are weighing on global investment. The Bank projects global GDP growth to slow from 3.25% in 2025 to about 3% in 2026 and 2027.

In the United States, strong AI-driven investment continues to support activity, but job growth has slowed, and tariffs are starting to push up consumer prices. The euro area is struggling with weaker exports and slowing domestic demand, while China has seen lower exports to the U.S. offset by higher sales to other markets—though overall business investment remains soft.

For Canada, GDP contracted by 1.6% in Q2, mainly due to weaker exports and sluggish business investment. Household spending remained solid, but U.S. tariffs and uncertainty have severely affected key sectors including autos, steel, aluminum, and lumber. The Bank expects GDP to stay weak through the second half of the year, before gradually improving as government and consumer spending rise and housing investment recovers.

The labour market remains fragile. Although September saw modest job gains, earlier losses were not fully recovered. Job declines in trade-sensitive industries persist, hiring remains subdued, and the unemployment rate stayed at 7.1%, with slower wage growth. A cooling population growth rate also means fewer new jobs are required to maintain employment stability.

The Bank forecasts GDP growth of 1.2% in 2025, 1.1% in 2026, and 1.6% in 2027, with excess capacity gradually absorbed.

Inflation measured 2.4% in September, slightly above expectations, while inflation excluding taxes was 2.9%. Core inflation remains around 3%, and broader indicators suggest underlying price growth near 2.5%. The Bank expects inflationary pressures to continue easing, keeping CPI inflation near the 2% target over the projection period.

Given the ongoing weakness in growth and inflation trending close to target, the Governing Council decided to cut rates by 25 basis points. If conditions evolve as projected, policymakers see the current rate as “appropriate to maintain price stability while helping the economy through a period of structural adjustment.”

The Bank noted that Canada’s economy is in a difficult transition. Trade-related structural damage has weakened economic potential and raised costs, limiting how much monetary policy can boost demand while keeping inflation low. The Bank emphasized its focus on maintaining Canadians’ confidence in price stability amid global volatility.