After holding rates steady for several months, the Bank of Canada lowered its key interest rate by 0.25 percentage points to 2.5 percent. It was the first cut since March to support the weakening economy. Governor Tiff Macklem told reporters there was “a clear consensus to cut our policy rate by 25 basis points,” noting the council had weighed holding steady but decided the balance of risks had shifted.
“Today we lowered the policy interest rate by 25 basis points to 2 and a.5%,” Governor Tiff Macklem said. He pointed to three main developments since the July decision: a softer labour market, diminished upward pressure on underlying inflation, and the removal of Canadian tariffs, reducing the risk of future price increases.
“Employment has declined in the past two months, increasing the unemployment rate to 7.1%,” Macklem said, while wage growth has continued to ease. He added that “consumption was stronger than expected in the second quarter and housing activity increased.”
Macklem explained that “total CPI inflation came out yesterday, 1.9%,” with preferred core measures still around three per cent but showing less momentum. “At this point, inflationary pressures look a little more contained, and against that background and the background of a weakening economy that will put additional downward pressure on inflation that tipped the balance of risks in favour of cutting our policy rate today,” he said.
Macklem avoided providing an explicit answer for how much further rates could fall and said, “It’s going to be about balancing those risks,… we’re not being as forward-looking as normal. We take our decisions independently of the political process. They are evidence-based decisions that will continue. End of story.”
The governor stated that the bank’s plan to normalize its balance sheet remains intact. He pointed to liquidity pressures from bond maturities and hedge fund activity in repo markets, while confirming that “we’re not contemplating any change in the deposit rate right now.”
Looking ahead to the October and December meetings, the bank highlighted several indicators it will monitor closely: exports, spillovers from trade weakness into employment and household spending, how new costs are passed on to consumer prices, and how inflation expectations evolve. Macklem concluded by reiterating the central bank’s mandate. “We will support economic growth while ensuring that inflation remains well controlled.”