Bank of Canada cuts key interest rate to 2.5%

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As trade disruptions slow global economic growth, the Bank of Canada has decided to cut the key lending rate by 25 basis points to 2.5 per cent.

The cut was widely anticipated by private sector economists after inflation data from Statistics Canada showed consumer prices rose by 1.9 per cent in August year over year.

It’s the first time the central bank has lowered interest rates since March of this year.

Governor of the Bank of Canada Tiff Macklem cited Canada’s softening labour market and removal of most retaliatory tariffs by Canada as reasons for the rate cut.

“With a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks of going forward,” said Macklem in a statement to journalists.

Canada’s gross domestic product slipped by about 1.5 per cent in the second quarter of this year as U.S. tariffs on Canadian goods and trade uncertainty weighed on economic activity. The central bank also noted exports from Canada fell by 27 per cent in the second quarter after a significant spike in the first quarter as companies rushed orders to attempt to get ahead of tariffs.

Macklem says there was a “clear consensus” to lower the policy rate to “better balance the risks going forward.”

Citing the unpredictability of U.S. trade policy, Macklem notes how tariffs are having a profound effect on several key Canadian sectors like auto, steel and the aluminium industry. Chinese tariffs on canola, pork and seafood are also contributing to the uncertainty in the Canadian economy leading to a contraction of business investment in the second quarter, according to Macklem. That has also led to the concentration of job losses in Canada to be concentrated in trade-sensitive sectors.

The bank notes consumption was stronger than expected in the second quarter of this year and housing activity increased. However, looking forward low population growth and weakness in the labour market are likely to weigh on overall household spending.

“The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the United States will mean less upward pressure on the prices of these goods going forward,” said Macklem.

While there was a clear consensus by the bank to lower the policy rate, the governing council will be keeping a close eye on the impacts of tariffs and the uncertainty they cause on economic activity and inflation.