Bank of Canada cuts rates to 2.5%, says ready to cut again if risks rise

[OTTAWA] The Bank of Canada reduced its key policy rate to a three-year low of 2.5 per cent on Wednesday (Sep 17), the first cut in six months, and said that it would be ready to cut again if risks to the economy increased in the coming months.

The 25-basis-point cut reflected a weak jobs market and less concern about underlying pressures on inflation, the bank said.

It paused its easing campaign in March after reducing rates by a total of 225 basis points in nine months, starting in June last year. Bank of Canada governor Tiff Macklem said the damaging effect of US tariffs meant considerable uncertainty remained.

“But 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 going forward,” he said in opening remarks to reporters.

The cut was a unanimous decision of the seven-member Governing Council, Macklem said. The last time the key rate hit 2.5 per cent was in July 2022.

The economy initially held up reasonably well in the face of tariffs on some critical sectors. But in the last two months, the job market has slumped, losing more than 100,000 positions. The unemployment rate is at a nine-year high, excluding the Covid-19 pandemic years. The economy contracted in the second quarter by 1.6 per cent, and the outlook for the third quarter is weak.

“In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending,” the bank said in a separate statement. While Macklem did not directly answer whether the central bank would consider a cut in October, he said the bank would be closely watching exports, the impact of weaker exports on the rest of the economy and costs on businesses.

“We’ve demonstrated today (that) if the risks tilt … we are prepared to take action and if there is a tilt further, we are prepared to take more action, but we are going to take it one meeting at a time,” he said.

The bank’s next rate announcement is on Oct 29, followed by another one in December.

While economists are widely expecting another rate cut before the end of the year, money markets are not factoring in more easing in 2025.

Money markets bets showed the odds of another rate cut at the central bank’s next rate decision on Oct 29 were roughly 48 per cent.

The Canadian dollar steadied at about C$1.3760 to the US dollar, or 72.67 US cents, after the rate cut, down 0.2 per cent on the day.

“I continue to look for another rate cut in October. I think 2.25( per cent) is the terminal interest rate level I am very comfortable with,” said Andrew Kelvin, head of Canadian and Global Rates Strategy at TD Securities.

Canada faces tariffs and duties from the US and China, two of its biggest trading partners. Macklem said that the direct impacts could spread into other parts of the economy.

Macklem expressed less concern about a possible spike in inflation due to reduced rates, even as the bank’s preferred measures of core inflation hover around 3 per cent, the top end of its 1 to 3 per cent target range. A broader range of indicators continues to suggest underlying inflation is running around 2.5 per cent, Macklem said, adding that Ottawa’s recent decision to remove retaliatory tariffs on many US imports would cut inflationary pressures.

“Still, the disruptive effects of shifts in trade will add costs even as they weigh on economic activity,” he said. The bank’s overall inflation target is 2 per cent. REUTERS