Bank of Canada Cuts Key Interest Rate to 2.5% as Economy Weakens

The Bank of Canada has lowered its benchmark interest rate by 25 basis points to 2.5%, the first cut since March. The move comes as the central bank looks to support a slowing economy, with job losses mounting and inflation pressures easing.

Governor Tiff Macklem, speaking in Ottawa on Wednesday, said the decision was unanimous among policymakers. He pointed to a weaker labour market, falling exports, and fewer inflation risks as the main drivers behind the cut.

“With a softer economy and less upward pressure on inflation, a rate reduction was the right step to better balance the risks ahead,” Macklem explained.

What's Driving the Decision?

• Jobs: Canada has shed more than 100,000 jobs in the past two months, pushing unemployment up to 7.1%.

• Trade Tensions: U.S. tariffs continue to weigh on key sectors like autos, steel, and aluminum. Chinese tariffs on Canadian goods such as canola and seafood add further strain.

• Growth: GDP shrank in the second quarter, while business investment has slowed in response to ongoing trade uncertainty.

• Inflation: Headline inflation sits at 1.9%, close to the Bank’s 2% target. Core inflation measures, which strip out volatile items like gas, have softened in recent months.

Relief for Borrowers

Following the Bank’s move, major lenders including TD, BMO, CIBC, and RBC cut their prime lending rates to 4.70%. That means some relief for variable-rate mortgage holders and borrowers, though experts say one small cut won’t be enough to spark a wave of business investment.

Will More Cuts Follow?

Most economists had predicted this rate cut, especially after August’s tame inflation report. RBC Global Asset Management’s chief economist Eric Lascelles described it as “entirely anticipated and ultimately welcome,” noting that Canada’s economy has been “profoundly underperforming” amid the trade war.

Lascelles and others expect the Bank could deliver more rate cuts before the end of 2025, with further easing possible in early 2026 if economic conditions don’t improve.

Looking Ahead

Macklem said the Bank of Canada does not expect a recession as long as U.S. tariffs remain at current levels. However, he cautioned that an escalation in trade barriers could change that outlook.

The next interest rate decision is scheduled for October 29.

CBC News

September 17, 2025