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Investing.com -- The Bank of Canada cut its key interest rate by 25 basis points to 2.5% on Wednesday, citing softening economic conditions and diminished inflation pressures. The move, widely anticipated by analysts, reduces the overnight rate from 2.75%, with the Bank Rate at 2.75% and the deposit rate at 2.45%.
Governor Tiff Macklem opened the central bank’s statement noting that the Governing Council is proceeding carefully, monitoring how tariff disruptions and trade uncertainty continue to weigh on Canada’s export-heavy sectors.
Canada’s real GDP declined by 1.6% in the second quarter, driven largely by a sharp pullback in exports amid lingering trade uncertainties. Tariffs not only suppressed outbound shipments, down 27% from the first quarter, but also weakened business investment, which contracted during the quarter.
Employment has also deteriorated since the Bank’s last decision in July. “First, Canada’s labour market has softened further,” Macklem said, noting that job losses have been especially pronounced in sectors tied heavily to U.S. trade, including autos, steel, and softwood lumber.
On inflation, the latest data show annual CPI at 1.9% in August, unchanged from July, while core inflation indicators hover closer to 2.5%. The removal of most Canadian retaliatory tariffs on U.S. imports is expected to ease price pressures on select goods moving forward.
Some data points offered glimmers of resilience in the economy, with housing activity and consumption rising modestly in the second quarter. However, weak hiring intentions and low population growth are expected to limit household spending in the months ahead.
Macklem cited an easing of price momentum and less risk to inflation as factors supporting the easing decision. “Second, although there are still some mixed signals, on balance, recent data suggest the upward pressures on underlying inflation have diminished,” he said.
While some uncertainty has receded amid relatively static U.S. tariff actions, geopolitical risks and concerns over future trade relationships, particularly the upcoming review of the USMCA trade agreement, remain. The Bank indicated it will “continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information.”