| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Change | -25bp | -25bp to 0bp | -25bp | 0bp |
| Level | 2.5% | 2.5% to 2.75% | 2.50% | 2.75% |
Highlights
As expected, the Bank of Canada cut its key policy rate by 25 basis points to 2.50 percent Wednesday, citing a weaker economy and less upside risk to inflation.
In his opening statement prior to the policy press conference, Governor Tiff Macklem more specifically cited three developments that have shifted the balance of risks since the July 30 status quo: softening labor market conditions, easing inflationary pressures despite mixed signals, and the removal of most retaliatory tariffs by Canada that lower inflationary risk.
Macklem left the door open for further rate cuts should economic conditions warrant it, noting that the BoC will continue to"look over a shorter horizon than usual, and be ready to respond to new information."
Going forward, the central bank still expects trade tensions to continue to add costs despite the drag on economic activity.
The policy rate had been at 2.75 percent since March, when it was lowered from 3.0 percent.
At 2.50 percent, the policy rate remains slightly above the nominal neutral range of 2.25 to 3.25 percent.
As the BoC proceeds carefully, its focus is on risks and uncertainties facing the Canadian economy as it supports growth while ensuring inflation remains under control. The central bank also noted signs of a slowing global economy.
On the inflation front, the BoC pointed out that the upward momentum in monthly core inflation has dissipated even as the Bank's own measures remain close to 3 percent. The most recent inflation data indeed showed that while headline inflation rose to 1.9 percent in August from 1.7 percent in July, two of the BoC's own measures of core inflation slowed down to 2.5 percent and 3.0 percent, respectively, with the third remaining stable at 3.1 percent. The average is currently at 2.9 percent. The central bank estimates that, based on broader measures, the underlying inflation rate is around 2.5 percent.
The BoC continues to closely watch the impact of trade on both inflation, actual and expected, and business and household activity.
The Canadian economy contracted at an annualized rate of 1.6 percent in the second quarter as exports collapsed. This was close to the Bank's projection of a 1.5 percent GDP contraction. The job market has also been rapidly deteriorating, with 65,500 jobs lost in August and 40,800 in July. The unemployment rate now stands at 7.1 percent, the highest since May 2016, excluding the 2020 and 2021 pandemic years. The BoC statement highlighted that job losses have been mainly concentrated in trade-sensitive sectors.
Looking at household spending, the central bank expects slow population growth and the weakness in the labor market to be a drag in months ahead.
A key piece of information missing is the 2025 federal budget, which won't be tabled until November 4. It remains to be seen how this will impact the central bank's assessment.
In its July 30 Monetary Policy Report, the central bank provided three scenarios: In the current scenario, Canada and China retaliatory tariffs are assumed to be permanent, while other countries are assumed to not retaliate, fostering high uncertainty into next year. After a decline in the second quarter of 2025, Canada's GDP grows by about 1 percent in the second half of this year, with exports stabilizing and household spending recovering. GDP growth accelerates to 1.8 percent in 2027. Inflation remains close to 2 percent over the forecasting horizon.
Under its de-escalation scenario, the BoC expects Canada and other countries to remove their retaliatory tariffs, and uncertainty decreases. GDP growth rebounds faster and inflation is expected to remain below the 2% target until late 2026. Inflation would average around 2 percent in 2027.
Canada's federal government recently decided to remove most retaliatory tariffs on imported goods from the U.S., which the BoC expects to lessen upward pressure on goods prices.
By contrast, under the escalation scenario, Canada and China double the value of U.S. goods subject to retaliatory tariffs, with other countries also increasing their tariffs on the U.S. Under this scenario, growth contracts through the end of 2025. CPI inflation is projected to peak at just above 2.5% in the third quarter of 2026, before receding to around 2 percent in 2027.
In his opening statement prior to the policy press conference, Governor Tiff Macklem more specifically cited three developments that have shifted the balance of risks since the July 30 status quo: softening labor market conditions, easing inflationary pressures despite mixed signals, and the removal of most retaliatory tariffs by Canada that lower inflationary risk.
Macklem left the door open for further rate cuts should economic conditions warrant it, noting that the BoC will continue to"look over a shorter horizon than usual, and be ready to respond to new information."
Going forward, the central bank still expects trade tensions to continue to add costs despite the drag on economic activity.
The policy rate had been at 2.75 percent since March, when it was lowered from 3.0 percent.
At 2.50 percent, the policy rate remains slightly above the nominal neutral range of 2.25 to 3.25 percent.
As the BoC proceeds carefully, its focus is on risks and uncertainties facing the Canadian economy as it supports growth while ensuring inflation remains under control. The central bank also noted signs of a slowing global economy.
On the inflation front, the BoC pointed out that the upward momentum in monthly core inflation has dissipated even as the Bank's own measures remain close to 3 percent. The most recent inflation data indeed showed that while headline inflation rose to 1.9 percent in August from 1.7 percent in July, two of the BoC's own measures of core inflation slowed down to 2.5 percent and 3.0 percent, respectively, with the third remaining stable at 3.1 percent. The average is currently at 2.9 percent. The central bank estimates that, based on broader measures, the underlying inflation rate is around 2.5 percent.
The BoC continues to closely watch the impact of trade on both inflation, actual and expected, and business and household activity.
The Canadian economy contracted at an annualized rate of 1.6 percent in the second quarter as exports collapsed. This was close to the Bank's projection of a 1.5 percent GDP contraction. The job market has also been rapidly deteriorating, with 65,500 jobs lost in August and 40,800 in July. The unemployment rate now stands at 7.1 percent, the highest since May 2016, excluding the 2020 and 2021 pandemic years. The BoC statement highlighted that job losses have been mainly concentrated in trade-sensitive sectors.
Looking at household spending, the central bank expects slow population growth and the weakness in the labor market to be a drag in months ahead.
A key piece of information missing is the 2025 federal budget, which won't be tabled until November 4. It remains to be seen how this will impact the central bank's assessment.
In its July 30 Monetary Policy Report, the central bank provided three scenarios: In the current scenario, Canada and China retaliatory tariffs are assumed to be permanent, while other countries are assumed to not retaliate, fostering high uncertainty into next year. After a decline in the second quarter of 2025, Canada's GDP grows by about 1 percent in the second half of this year, with exports stabilizing and household spending recovering. GDP growth accelerates to 1.8 percent in 2027. Inflation remains close to 2 percent over the forecasting horizon.
Under its de-escalation scenario, the BoC expects Canada and other countries to remove their retaliatory tariffs, and uncertainty decreases. GDP growth rebounds faster and inflation is expected to remain below the 2% target until late 2026. Inflation would average around 2 percent in 2027.
Canada's federal government recently decided to remove most retaliatory tariffs on imported goods from the U.S., which the BoC expects to lessen upward pressure on goods prices.
By contrast, under the escalation scenario, Canada and China double the value of U.S. goods subject to retaliatory tariffs, with other countries also increasing their tariffs on the U.S. Under this scenario, growth contracts through the end of 2025. CPI inflation is projected to peak at just above 2.5% in the third quarter of 2026, before receding to around 2 percent in 2027.
Market Consensus Before Announcement
This one could hinge on the outcome of the CPI report the day before the governing council meets. Most forecasters see a 25 BP rate cut but a staunch minority sees no change. The no change camp argues that inflation will keep the Bank of Canada on hold even as the job market tanks.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
