The Bank of Canada trimmed its key overnight lending rate for the second consecutive time on Wednesday, bring it down to “about the right level” to keep inflation near its preferred 2% target while also supporting the economy – at least for now.
Today’s 25-basis point reduction brings the Bank’s rate to 2.25%, the lowest since July 2022. The Bank also cut its key policy rate by 25 basis points in September.
The central bank’s move, largely anticipated by markets, reflects mounting evidence of economic weakness amid persistent uncertainty tied to US trade actions. In its latest Monetary Policy Report, the Bank said the impacts of tariffs and trade disputes are “more evident” and that the conflict “is fundamentally reshaping Canada’s economy.”
The report projects Canada’s GDP to grow by 1.2% in 2025, 1.1% in 2026, and 1.6% in 2027, with only modest recovery expected after a contraction of 1.6% in the second quarter. The slowdown has been driven by slumping exports and business investment, even as household and government spending remain resilient. The Bank noted that trade-sensitive sectors such as autos, steel, aluminum, and lumber continue to experience “severe effects,” leading to job losses and a soft labour market.
Inflation pressures are expected to ease in the coming months. CPI inflation stood at 2.4% in September, slightly above expectations, while core inflation measures remain “sticky” near 3%. The Bank estimates that underlying inflation is roughly 2.5% and expects it to remain close to the 2% target through the projection horizon.
Globally, the Bank said economic growth is softening, with the global economy projected to slow from about 3.25% in 2025 to 3% in 2026 and 2027. While US activity remains strong thanks to AI-related investment, tariffs are pushing up consumer prices, and uncertainty continues to weigh on trade and investment.
The Bank said that if inflation and growth evolve “broadly in line” with its forecast, the current rate is “at about the right level” to balance price stability and economic support. However, it cautioned that monetary policy has limited ability to offset the “structural damage caused by the trade conflict.”
“This limits the role that monetary policy can play to boost demand while maintaining low inflation. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”
