By The Canadian Press

Bank of Canada cuts key interest rate to 2.5% as U.S. tariff risks shift

Sep 17, 2025 | 2:00 AM

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 central bank’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’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 told reporters after the rate decision Wednesday.

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The Bank of Canada signalled it will keep looking over a shorter horizon than usual as it tries to set monetary policy in a constantly shifting environment.

Macklem said the bank is ready to adjust its policy rate again if warranted.

“We’ve demonstrated today, if the risks tilt, if the risks shift, we’re prepared to take action,” he said. “And if the risks tilt further, we are prepared to take more action. But we’re going to take it one meeting at a time.”

Macklem said some of the stickiness in underlying inflation that was worrying the Bank of Canada earlier this year now appears to be diminishing.

The federal government’s decision to drop most retaliatory tariffs against the United States at the start of this month will also take some fuel out of price growth, he said.

Counter-tariff impacts were most noticeable in food in recent months, Macklem said, but with the removal of those measures, prices should fall back in affected areas going forward.

Canada’s jobless rate has meanwhile moved up to 7.1 per cent and the economy shrank in the second quarter as U.S. tariffs took full effect.

Macklem reiterated that the central bank does not currently have a recession baked into its outlook, calling instead for modest growth of roughly one per cent in the second half of the year.

“It’s not going to feel good. It is growth, but it’s slow growth,” he said.

While the decision to lower the policy rate was widely expected by economists — and came from a consensus of the central bank’s governing council — not all forecasters were in favour of the cut.

Nathan Janzen, assistant chief economist at RBC, said Wednesday’s decision was going to be a “close call” but he’s not convinced the economy needed rate-cut stimulus.

Consumer spending is holding up and could push inflation higher going forward, he argued.

Meanwhile, economic weakness is still largely concentrated in trade-exposed sectors — an arena for governments to support, not the central bank.

“There’s probably a better policy response than changes in interest rates,” Janzen said.

Macklem acknowledged that he believes fiscal policy is better suited to handle the sector-specific impacts of U.S. tariffs, while the Bank of Canada’s interest rate can smooth the broader hit from the ensuing shifts in the economy.

“Monetary policy can’t undo the effects of tariffs. The most it can do is try to help the economy adjust at a macro level while keeping inflation well controlled,” he said.

The Bank of Canada’s next rate decision will come before the federal government’s long-awaited fall budget, which Finance Minister François-Philippe Champagne announced Tuesday would come on Nov. 4.

Macklem largely dismissed reporter questions Wednesday about whether the lack of fiscal clarity was affecting the Bank of Canada’s decisions. He said government spending plans were just one input into the central bank’s forecasts, and monetary policymakers would adjust their models after the budget is tabled.

Janzen said that while RBC wasn’t calling for a rate cut this month, at 2.5 per cent the policy rate is only slightly below the middle of the central bank’s estimated “neutral range” — where it’s neither boosting nor restricting economic growth.

“It’s not aggressively stimulating the economy. It’s still akin to easing your foot off the brakes rather than stepping on the gas from a monetary policy perspective,” he said.

While there are still a lot of unknowns tied to U.S. tariffs and the global trade disruption, Macklem said “near-term uncertainty may have come down a little.”

If the tariff situation with the United States remains steady, he said the central bank will likely return to publishing a single, central forecast for the economy at its next monetary policy decision on Oct. 29.

CIBC senior economist Katherine Judge said in a note to clients Wednesday that the economy is “losing resilience” and inflation should remain well contained moving forward.

She argued that will set the central bank up for another cut at its October decision.

Financial markets were placing odds of another quarter-point cut next month at just over 40 per cent as of Wednesday afternoon, according to LSEG Data & Analytics.

Janzen said it would be rare for a central bank to either cut or hike its policy rate just once, and RBC is now also expecting additional rate cuts to follow.

But he cautioned that the Bank of Canada is still “ultra-focused” on near-term indicators, so incoming data on inflation, the labour market and international trade could sway the central bank back to a hold in the coming weeks.

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