Canada Rate Cut: Bank of Canada Lowers Interest Rate to 2.25% Amid Economic Strain

By Patrick Timely

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Second rate cut comes as growth outlook dims

The Bank of Canada has lowered its benchmark interest rate by another 25 basis points, setting the key overnight rate at 2.25%. The move, widely expected by markets, reflects growing concerns over weak domestic growth and the ongoing impact of U.S. trade tariffs. It marks the second consecutive rate cut and brings borrowing costs to their lowest level since July 2022.

Governor Tiff Macklem described the cut as a measured response to economic disruption from U.S. trade policy, which has slowed demand while increasing operating costs for Canadian businesses. The central bank now forecasts GDP growth of just 1.2% in 2025 and 1.1% in 2026—down from earlier estimates of 1.8% for both years. A modest recovery to 1.6% is projected for 2027.

While the Bank’s move comes amid signs of a softening economy, including a 1.6% contraction in Q2, recent data painted a mixed picture. Inflation ticked up 0.5 percentage points in September, and job gains surprised with 60,400 new positions added that month.

Despite the inflationary pressure, the Bank’s Monetary Policy Report reaffirmed its commitment to the 2% inflation target. It now expects inflation to average around that level through 2026. For the current year, GDP is projected to grow by 0.5% in the third quarter and 1% in Q4.

Bank signals likely pause in rate cuts

In its announcement, the Bank emphasized that the current policy rate is appropriate given its latest projections. “If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level,” the statement read.

The outlook suggests a pause in further easing unless new economic shocks emerge. Royce Mendes of Desjardins noted that “it would take a prolonged period of weakness or a new shock for central bankers to move off of the sidelines”.

Governor Macklem acknowledged that the Canadian economy is undergoing more than a typical downturn, describing it as a “structural transition.” He also warned that monetary policy has limits when navigating such long-term changes.

The Bank has reinstated its full economic forecasting after a temporary suspension, and officials remain cautious about external risks, particularly stemming from unpredictable U.S. trade policies. “We need to be humble about our forecast,” Macklem added. “If the outlook changes, we are prepared to respond.”

The bottom line

With its second rate cut in as many months, the Bank of Canada is attempting to balance weak economic momentum against persistent inflation and global trade volatility. While the 2.25% rate may now serve as a steadying point, the path forward remains uncertain—hinging on whether economic conditions stabilize or deteriorate further.

Source:: Canada Rate Cut: Bank of Canada Lowers Interest Rate to 2.25% Amid Economic Strain