Tiff Macklem, Governor of the Bank of Canada, speaks during a news conference at the Bank of Canada auditorium in Ottawa, Ontario, Canada, on July 12, 2023. (Photo by Dave Chan / AFP)
OTTAWA—The Bank of Canada has lowered its key interest rate for the first time since March, reducing it from 2.75 percent to 2.5 percent.
The Bank said its governing council made the unanimous decision to lower rates because Canada’s labour market has further softened, inflation pressures have diminished, and there is less “upside risk” to future inflation because of the Canadian government’s removal of most retaliatory tariffs on the United States.
“Considerable uncertainty remains. But with a weaker economy and less upside risk to inflation, the Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks going forward,” Bank of Canada Governor Tiff Mackelm said during a press conference on Sept. 17.
Macklem said Canada’s economy is being impacted by both U.S. tariffs and the “unpredictability” of U.S. trade policy. GDP declined by 1.6 percent in the second quarter of the year, which was in line with what the Bank of Canada had expected, as exports to the United States fell.
U.S. tariffs on Canadian automobiles, steel, and, aluminum are having a “profound impact,” according to Macklem. He also noted that U.S. tariffs on copper and higher tariffs on softwood lumber, as well as Chinese tariffs on Canadian canola, pork, and seafood, will “spread the direct impacts further.”
The United States has placed a series of tariffs on Canada, including 50 percent tariffs on steel, aluminum, and copper, 25 percent tariffs on vehicles and auto parts, and 10 percent tariffs on oil and potash. The United States has also put a general 35 percent tariff on Canadian goods not covered under the United States-Mexico-Canada Agreement, and U.S. President Donald Trump has said he plans to implement additional tariffs on pharmaceuticals and semiconductors.
Macklem said business investment contracted in the second quarter due to concerns over U.S. trade policy, with many businesses raising concerns that demand in Canada will weaken further. The unemployment rate also rose to 7.1 percent, with “significant” job losses in sectors that rely on trade with the United States.
The Consumer Price Index was at 1.9 percent in August, just under the Bank of Canada’s inflation target of 2 percent. While “preferred measures of core inflation” have been at around 3 percent in recent months, Macklem said the upward momentum seen earlier in the year has “dissipated.” Macklem said underlying inflation appears to be running at around 2.5 percent.
Macklem said while Ottawa’s removal of retaliatory tariffs will reduce upward pressure on inflation, “the disruptive effects of trade will add costs even as they weigh on economic activity.” He added that it is “difficult to predict the extent of cost increases, where they will show up, and how they could be passed through to consumer prices.”
On a positive note, Macklem said consumption was stronger than expected in the second quarter and housing activity increased, but he said low population growth and labour market weakness in the coming months will likely weigh on spending.
The governor said the Bank will continue to assess economic risks, look “over a shorter horizon than usual,” and prepare to respond to new information. “We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval,” Macklem said.
The Bank of Canada said in the U.S. business investment has been strong but consumer demand has weakened and employment gains has slowed down, while inflation has risen in recent months as businesses pass on tariff-related costs to consumers. Growth in Europe has slowed due to tariffs, while China’s economy appears to be softening as investment weakens.
The Bank will announce their next interest rate decision on Oct. 29, 2025, and will also release their October Monetary Policy Report at the same time.
Macklem told reporters that while monetary policy is unable to reverse the impacts of U.S. tariffs that are “weakening” Canada’s economy, it can help the economy adjust to the impacts while keeping inflation low. “If the risks shift, we’re prepared to take action, and if the risks tilt further, we’re prepared to take more action, but we’re going to take it one meeting at a time,” he said.
Matthew Horwood is a reporter based in Ottawa.