The Bank of Canada lowered interest rates to 2.25 per cent on Wednesday, but cautioned that monetary policy can’t fix the structural economic damage caused by the U.S. trade war.
The central bank said it made the 25-basis-point cut as weakness ripples through the Canadian economy and with inflation expected to stay close to the bank’s two per cent target.
“For many months, we have been stressing that monetary policy cannot undo the damage caused by tariffs,” said Bank of Canada governor Tiff Macklem in his opening statement.
“Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income. Monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path.”
The bank also indicated that if inflation evolves broadly in line with expectations, hovering around its two per cent target, that it will hold rates at their current level.
However, if the outlook changes, “we are prepared to respond,” Macklem said.
Growth expected to stay weak for rest of the year
The bank outlined some of the economic conditions that influenced the decision to lower rates.
Canada’s economy shrank in the second quarter, the bank noted, as exports dropped and businesses made fewer investments because of trade-related uncertainty.
The labour market is still showing weakness and hiring has slowed, with thousands of job losses in industries vulnerable to the U.S. trade war.
Because the trade conflict is having “severe effects” on tariff-hit sectors like autos, steel, aluminum and lumber, GDP is expected to be weak in the second half of the year, the bank said.
However, consumer spending has grown at a “healthy pace” and is expected to continue growing into the end of the year alongside real estate investment and government spending, the release noted.
The bank said it expects inflation to stay close to its target in the coming months and that inflationary pressures will ease as well.
While weak economic growth is keeping price increases subdued, tariff-related costs for businesses are putting pressure on inflation, and the bank expects these two forces will offset each other.
Even as the bank indicates that it’s done lowering rates for now, some economists still expect more cuts down the line.
“The Bank appears to believe that the easing to date will offer support; inflation is steadily on its way back to 2 [per cent]; and the usefulness of monetary policy is somewhat limited in this unique economic environment,” wrote Robert Kavcic, a senior economist at BMO.
“That said, we believe that ongoing softness in the job market leaves the door open for some further support, and another 25 [basis point] rate is still on the table for early-2026.”
