The Bank of Canada has lowered its key interest rate to 2.25%, marking the second consecutive reduction amidst growing economic uncertainty. This decision arrives as escalating trade tensions with the United States cast a shadow over Canada’s economic future. Despite inflation remaining largely contained, a slight uptick to 2.4% in September – following 1.9% in August – prompted the central bank’s move.
Governor Tiff Macklem has directly warned of the damaging effects of ongoing U.S. tariffs on vital Canadian exports. Vehicles, steel, aluminum, and lumber are all facing increased costs, creating a drag on economic growth, particularly anticipated in the latter half of the year. The central bank acknowledges the structural damage inflicted by the trade conflict, reducing the economy’s overall capacity and increasing costs for businesses.
The latest rate cut – a quarter of a percentage point – follows a period of stability where the Bank of Canada held rates steady as tariffs began to bite. While offering potential relief to borrowers, the reduction also carries the risk of fueling inflation as spending is expected to rise. The Bank is simultaneously resuming its quarterly publication of the Monetary Policy Report, providing detailed projections for the Canadian and global economies.
Canada’s economy is actively seeking new trade partners in response to the ongoing conflict. However, the impact is already visible: the economy contracted by 1.6% in the second quarter, driven by decreased exports and reduced business investment. Despite this contraction, household spending has remained surprisingly robust. The Canadian dollar has also experienced a slight devaluation against its U.S. counterpart, while the labor market shows signs of fragility.
The interest rate serves as the Bank of Canada’s primary tool for managing inflation and controlling the cost of goods. A struggling economy risks pushing inflation below the target of 2%. Lowering the rate aims to stimulate spending and investment by reducing borrowing costs for individuals and businesses, though it simultaneously lowers returns on savings. The Bank’s central focus remains maintaining Canadians’ confidence in price stability during this period of global disruption.
Trade investment has weakened as global relationships are reshaped and tensions persist. Projections within the Monetary Policy Report suggest a slowdown in global economic growth, from approximately 3.25% in 2025 to around 3% in both 2026 and 2027 if the trade war continues unabated. These forecasts underscore the significant impact of international trade dynamics on Canada’s economic outlook.
Looking ahead, the next interest rate update is scheduled for December 10th, with the subsequent Monetary Policy Report due to be released on January 28, 2026. Recent history reveals a volatile period for interest rates. A year ago, a half-percentage point cut brought the rate down from 4.25% to 3.75%. Prior to that, inflation prompted aggressive rate hikes, peaking at 5% in the summer of 2023. The COVID-19 pandemic triggered an emergency rate reduction to 0.25% in March 2020, followed by a rapid series of increases as inflation surged in 2022.
