Bank of Canada cuts rate to 2.25%, warns limits of policy

The Bank of Canada lowered its benchmark interest rate by 25 basis points to 2.25 per cent on Wednesday, but cautioned that monetary policy cannot repair the lasting structural damage caused by the U.S. trade war.

Governor Tiff Macklem said the decision reflects “weakness rippling through the Canadian economy,” adding that inflation is expected to remain near the bank’s two per cent target.

“For many months, we have been stressing that monetary policy cannot undo the damage caused by tariffs,” Macklem said during a conference in Ottawa. “While it can help the economy adjust, it cannot restore it to its pre-tariff path.”

Macklem signaled that the central bank will likely hold rates steady if inflation remains on course, but said officials are “prepared to respond” if conditions change.

The bank’s Monetary Policy Report, released alongside the announcement, warned that the trade conflict is “fundamentally reshaping” Canada’s economy — particularly in sectors like autos, steel, aluminum, and lumber, which continue to feel the brunt of U.S. tariffs.

Weak Growth Outlook

The economy contracted in the second quarter, with declining exports and reduced business investment amid trade uncertainty. The labor market has softened, showing slower hiring and thousands of job losses in tariff-hit industries.

Despite the challenges, consumer spending, real estate investment, and government spending remain bright spots. The central bank expects modest growth and inflation to hover near target levels through the end of the year.

“Whether we see a slight pickup or a few quarters of negative growth, Canadians are not going to feel very good,” Macklem said, acknowledging the difficult outlook.

‘Rates Are About Right’

The Bank of Canada described the current interest rate as “about the right level” to balance inflation and economic adjustment. Macklem hinted that further changes would depend on a “material shift” in the economic outlook.

Economists say the rate cut may have a limited impact. Robert Kavcic, senior economist at BMO, noted that while lower rates can boost demand, they won’t directly help industries suffering from tariffs.

“From here on out, it’s up to fiscal policymakers to take the baton and support sectors hit hardest by the trade war,” Kavcic said.

Some analysts, however, believe continued weakness in the labor market could leave the door open for another 25-basis-point cut in early 2026.

The Bank of Canada will issue its next interest rate decision on December 10.