OTTAWA — The Bank of Canada cut its benchmark interest rate by a quarter point on Wednesday as the central bank worries less about inflation risks and more about a slowing economy.
The Bank of Canada’s policy rate now stands at 2.5 per cent, breaking a streak of three consecutive holds since March.
Governor Tiff Macklem said the risks have shifted since the Bank of Canada’s last interest rate decision in July.
Cracks in the labour market and a sharp drop in exports are threatening growth, he said, while earlier signs of underlying inflation pressure are fading.
“With a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks,” he said in prepared remarks.
Annual inflation stood at 1.9 per cent in August, Statistics Canada reported Tuesday, with core inflation figures holding around three per cent year-over-year.
But the Bank of Canada, looking at a broader range of indicators, still sees underlying inflation holding at around 2.5 per cent.
Macklem also said the federal government’s decision to drop most retaliatory tariffs against the United States at the start of this month will take some fuel out of inflation.
The national unemployment rate meanwhile rose to 7.1 per cent after Canada’s economy shed more than 100,000 jobs across July and August. Real gross domestic product fell 1.6 per cent annualized in the second quarter.
Economists expect employers were rushing to get ahead of U.S. tariffs in the first quarter, pulling forward activity and driving the second-quarter contraction.
Macklem said that while there are still a lot of unknowns tied to U.S. tariffs and the global trade disruption, “near-term uncertainty may have come down a little.”
He said there was a “clear consensus” among governing council to cut the policy rate Wednesday. Economists widely expected the move heading into the announcement.
The Bank of Canada signalled it will keep looking on a shorter horizon than usual as it tries to set monetary policy in a constantly shifting environment.
Monetary policymakers will be looking at how export activity evolves and whether costs from the trade disruption are passed on to consumers as it gauges where to take the policy rate next.
This report by The Canadian Press was first published Sept. 17, 2025.
Craig Lord, The Canadian Press
