Bank of Canada Cuts Key Interest Rate to 2.5% Amid Economic Strains
The Bank of Canada has just announced that its policy interest rate has been lowered by a quarter of a percentage point, bringing it down to 2.5%. This marks a shift in the central bank’s approach, as signs of weakness in both the global and domestic economy have become harder to ignore. The decision was taken to help balance risks and support growth, while keeping inflation expectations steady.
Globally, the picture has been mixed. The United States has continued to show strong business investment, but consumer spending is soft, and job growth has slowed. Inflation there has been picking up as tariff costs are increasingly being passed down to households. Europe has been feeling the weight of American trade measures too, and growth across the eurozone has cooled. China, which had held up relatively well earlier in the year, is now showing signs of slowing investment. Energy prices, meanwhile, have remained fairly stable, not straying far from what was projected earlier in the summer.
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Closer to home, Canada’s economy shrank by about one and a half percent in the second quarter. Exports dropped sharply by more than a quarter, a direct reversal from earlier gains when companies were rushing shipments ahead of tariffs. Business investment has also weakened, while household consumption and housing activity have shown some resilience. Despite that, the job market has softened. Employment has been falling over the past two months, especially in sectors most exposed to trade, and overall hiring has slowed. The unemployment rate climbed to 7.1% in August, while wage growth has lost momentum.
On the inflation side, the numbers have been fairly steady. The consumer price index sat at 1.9% in August, with core measures hovering around 2.5% on average. Though inflation has not surged, pressures from tariffs earlier in the year had raised concerns. With the federal government recently rolling back most retaliatory tariffs on U.S. goods, some of that pricing pressure should now ease.
Given these conditions, policymakers felt a rate cut was the right step. By lowering borrowing costs, the Bank of Canada aims to cushion the economy from global trade disruptions and weaker domestic demand. At the same time, officials stressed that they are moving carefully, watching closely how exports respond to U.S. tariffs, how business investment and hiring evolve, and how these trends influence inflation.
The next scheduled announcement is set for October 29, 2025, alongside the Bank’s quarterly Monetary Policy Report. Until then, attention will be focused on whether this rate cut will be enough to steady confidence and keep inflation expectations anchored, all while helping Canadian households and businesses navigate an uncertain global economy.
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