Bank of Canada Cuts Key Interest Rate to 2.25%, Signals Pause Ahead
The Bank of Canada has taken another step to support the country’s slowing economy by cutting its key interest rate by 25 basis points, bringing it down to 2.25%. The move, announced on Wednesday, comes as Canada faces mounting economic challenges — from weak growth and rising unemployment to the impact of ongoing U.S. trade tensions.
Governor Tiff Macklem explained that while inflation has remained “slightly higher” than expected, the central bank believes those pressures will ease over the coming months. The decision reflects a cautious effort to balance inflation control with the need to keep the economy from stalling.
Recent data shows that Canada’s GDP contracted by 1.6% in the second quarter, while the unemployment rate climbed to 7.1% — its highest level since 2016, excluding the pandemic years. With hiring freezes and layoffs becoming more common, the rate cut is seen as an attempt to give households and businesses some breathing room.
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Macklem acknowledged that uncertainty stemming from U.S. tariffs and protectionist trade policies has weighed heavily on Canadian businesses. “Canadian businesses and households are feeling the consequences of increased U.S. protectionism,” he said, adding that this uncertainty continues to challenge the country’s economic stability.
Even with this latest adjustment, the Bank of Canada signaled it may now hold steady. Macklem noted that, assuming the economy evolves as forecasted, no further rate cuts are being considered for now. He described the current rate level as “about right” to keep inflation close to the 2% target while guiding the economy through what he called a “period of structural adjustment.”
That phrase essentially refers to the country adapting to a changing trade environment — one where the U.S. tariffs have forced Canada to look for new markets and trading partners. The bank has already lowered rates by a full percentage point since the start of the year, showing how seriously it views the economic slowdown.
Still, not everyone believes the cutting cycle is finished. Economist Stephen Brown from Capital Economics interpreted Macklem’s comments as a signal that rates will likely stay put in December, but he expects further reductions might come later next year if growth remains sluggish.
The Bank of Canada’s latest projections show GDP growing by just 1.2% in 2025 and 1.1% in 2026. While the central bank is not officially forecasting a recession, Macklem did acknowledge that a “technical recession” — two consecutive quarters of negative growth — is possible.
As the government prepares to release its federal budget next week, policymakers are expected to roll out additional fiscal measures to stimulate growth. However, those efforts could complicate the inflation outlook. For now, the Bank of Canada appears to be treading carefully — easing just enough to support the economy, but not so much that inflation flares up again.
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