The Bank of Canada announced a 25 basis point interest rate cut to respond to tariff shocks, with future policy paths remaining uncertain

According to the Zhitong Finance APP, the Bank of Canada announced on Wednesday during its interest rate meeting that it would lower the benchmark overnight rate by 25 basis points to 2.5%, marking the first rate cut since March of this year. This move aligns with market expectations and aims to address the ongoing impact of U.S. tariffs on the Canadian economy and job market. However, the central bank did not clarify its future easing path in the statement, indicating that decision-makers are maintaining a cautious balance between economic downward pressure and inflation risks.

Governor Macklem stated at a press conference that the recent slowdown in economic growth and the weakening of inflationary risks led the decision-making committee to unanimously agree that a rate cut would help "better balance economic and inflation risks." Canada’s GDP contracted at an annualized rate of 1.6% in the second quarter, primarily dragged down by a significant decline in exports and business investment. The central bank explicitly stated that "U.S. tariffs and trade uncertainties are severely suppressing economic activity."

The deterioration of the labor market is another major trigger for this rate cut. Data shows that Canada lost over 106,000 jobs in July and August, with the unemployment rate rising to 7.1%, most of which is concentrated in the manufacturing, retail, and wholesale sectors that are heavily impacted by trade. Signs of a slowdown in hiring are also beginning to appear in other industries. The central bank pointed out that while consumption and real estate activities are still maintaining "healthy growth," the slowdown in population growth and weak employment will limit household spending.

Tariffs have become a core factor in the current economic weakness. The Trump administration has imposed a 35% tariff on Canadian goods that do not comply with the North American Free Trade Agreement and additional tariffs on key industries such as steel, aluminum, automobiles, and copper. Canadian Prime Minister Carney recently canceled most of the counter-tariffs against the U.S. in an attempt to ease trade tensions and reduce pressure on domestic inflation. Macklem emphasized, "Tariffs have had a profound impact on key industries such as automobiles, steel, and aluminum."

Despite the unanimous decision to cut rates, Macklem revealed that policymakers also discussed the possibility of keeping rates unchanged. The final statement removed the wording from the July meeting regarding "potential further rate cuts in the future," instead indicating a "cautious approach" due to the ongoing turbulence in the global trade landscape, which will continue to increase economic costs while limiting growth prospects.

Market interpretations suggest that while the central bank is restarting easing, it does not wish to enter an aggressive rate-cutting cycle too quickly to prevent input inflation risks caused by global protectionism. Stephen Brown, Deputy Chief North American Economist at Capital Economics, pointed out that the policy rate has fallen below the midpoint of the central bank's neutral range of 2.25% to 3.25% for the first time since the onset of the COVID-19 pandemic, indicating that current policy has shifted towards easing.

After the interest rate decision was announced, the Canadian dollar fell against the U.S. dollar, briefly hitting a daily low. The yield on Canada’s two-year government bonds rose slightly by 2 basis points to 2.48%, while the 10-year yield remained around 3.15%, nearly 90 basis points lower than U.S. Treasuries.

The interest rate swap market shows that investors have fully priced in at least one more rate cut in this cycle, with about a 50% probability that the central bank will cut rates again at the October meeting. Katherine Judge, an economist at the Canadian Imperial Bank of Commerce, stated, "With the unemployment rate remaining high and counter-tariffs being canceled, inflation will be suppressed, and we expect a further 25 basis point rate cut in October." However, there are also cautious viewpoints. Tony Stillo and Michael Davenport from Oxford Economics believe that this does not signal the start of a deep easing cycle, and they expect the central bank to maintain the policy interest rate at 2.25% after another rate cut in October until 2026. They point out that the large-scale fiscal stimulus that may be introduced in this fall's federal budget will become the main force supporting the economy, while monetary policy will play a supplementary role.

Doug Porter, chief economist at the Bank of Montreal, stated, "This rate cut better balances economic and inflation risks, and the central bank will dynamically adjust its policy based on short-term economic data." He anticipates two more rate cuts in the coming months.

Core inflation indicators continue to decline, with the central bank's preferred trimmed mean and median indicators' annual rate dropping to around 3%, and broad inflation pressures nearing 2.5%. Wage growth continues to slow, and the year-on-year growth rate of the Consumer Price Index (CPI) remains around 2%. McClellan noted, "The latest data shows that upward pressure on underlying inflation is weakening."

The central bank is also closely monitoring how tariff disruptions and supply chain restructuring are transmitted to consumer prices and inflation expectations. McClellan pointed out that recent U.S. tariff policies have been relatively stable, but the impending renegotiation of the North American trade agreement will become a new source of uncertainty