The Bank of Canada lowered interest rates by 25 basis points as scheduled, providing almost no guidance for future rate cuts, stating that it is acting cautiously amid risks

As Canada's economy and labor market are impacted by U.S. tariffs, the Bank of Canada lowered its benchmark overnight rate by 0.25 percentage points to 2.5% on Wednesday, marking its first rate cut since March, in line with market expectations and those of most economists.

However, the Bank of Canada remains silent on the future path of monetary easing. The statement provided little guidance on future rate cuts and removed the phrase "may need further rate cuts" mentioned in the July meeting. Officials indicated that future monetary easing will proceed cautiously, as the disruptive effects of changing trade patterns continue to weigh on economic activity while increasing costs.

Bank of Canada Governor Tiff Macklem stated in prepared remarks:

Due to economic weakness and reduced inflationary risks, the Governing Council believes that a rate cut will help better balance future risks. There is a clear consensus on this rate cut.

Tariffs have had a profound impact on several key industries, including automotive, steel, and aluminum.

Recent data shows that upward pressure on potential inflation has weakened.

There have been signs of some stabilization regarding U.S. tariffs, and short-term uncertainty may have slightly decreased, but the upcoming renegotiation of the USMCA is becoming a focal point.

Canada's economy contracted at an annualized rate of 1.6% in the second quarter, roughly in line with the central bank's expectations. This contraction was primarily driven by declines in exports and business investment.

The Bank of Canada stated that U.S. tariffs and trade uncertainty are severely dragging down economic activity. The central bank reiterated that it is monitoring the development of exports under the threat of U.S. tariffs and how the damage may spread to investment, employment, and household spending. Officials are also observing how tariff disruptions and supply chain changes are transmitted to consumers and their inflation expectations.

Bank of Canada officials noted that economic pressures in the country are intensifying, including further softening in the labor market. Canada lost a total of 106,000 jobs in July and August, primarily concentrated in trade-sensitive industries. Additionally, hiring in other sectors of the economy is also slowing, and the unemployment rate has risen to 7.1%.

Officials also mentioned that Canadian Prime Minister Mark Carney's cancellation of some retaliatory tariffs on U.S. imports has eliminated a potential source of inflation. Policymakers downplayed the still-high core inflation pressures, stating that the upward momentum of the central bank's preferred trim and median indicators has "faded." These indicators currently have an annual growth rate close to 3%, but the central bank noted that broader potential pressures are approaching 2.5%. Furthermore, the central bank indicated that wage pressures are also continuing to ease.

While the Bank of Canada stated that consumption and housing growth are healthy, it also warned that slowing population growth and a weak labor market may suppress household spending.

The Bank of Canada's policymakers did not mention financing pressures in the money market. For most of September, the Canadian overnight repo rate has been about 5 basis points higher than the Bank of Canada's overnight rate. The central bank has set the deposit rate at 2.45%, which is still 5 basis points lower than the policy rate.

Market Reaction and Analysis Commentary

After the Bank of Canada's interest rate decision was announced, the Canadian dollar fell to a daily low against the US dollar, trading at 1 USD to 1.3763 CAD. Canadian government bonds performed steadily across various maturities, with the two-year yield remaining almost unchanged at 2.46%. Overnight swap traders continue to fully price in the possibility of another rate cut in this cycle, believing that the probability of a rate cut in October is about fifty-fifty.

Media analysis indicates that, overall, the Bank of Canada's statements suggest that while it has restarted monetary easing to support a weak economy, it is reluctant to cut rates too quickly due to inflation risks that may arise from global protectionism and rising tariffs.

Charles St-Arnaud, chief economist at the Alberta Central Bank, stated, "In my view, the Bank of Canada is taking a wait-and-see approach but is inclined towards further rate cuts."

Katherine Judge, an economist at the Canadian Imperial Bank of Commerce, wrote in a report, "We believe the economy is losing resilience, and high unemployment and the removal of retaliatory tariffs will continue to suppress inflation, so we expect a 25 basis point rate cut in October."

Bloomberg Economics commented, "We have consistently expected the overnight rate target to fall to 2.25% by the end of the year, and this remains our baseline expectation following the Bank of Canada's dovish statement this time."

Stephen Brown, North America Deputy Chief Economist at Capital Economics, pointed out that the Canadian policy rate has now fallen below the midpoint of the central bank's neutral range of 2.25%–3.25%, marking the first time since the early pandemic. The relatively neutral tone of the central bank's policy statement suggests that a rate cut in October is not necessarily guaranteed."