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Bank of Canada

Bank of Canada Cuts Interest Rate Amid Economic Slump

Strategic Insights

— 2 min read

The Bank of Canada cut its policy rate by 25 basis points to 2.5 per cent, amid concerns of a possible recession due to a significant drop in exports and a contraction in gross domestic product. The economic downturn, fueled by tariffs and uncertainty related to tariffs, has led to a decline in employment, with a loss of over 100,000 positions in July and August. The unemployment rate has hit 7.1 per cent, its highest since 2016, outside of the pandemic.

Key Takeaways:

  • The Canadian economy contracted at an annualized pace of 1.6 per cent in the second quarter, with gross domestic product (GDP) declining by 0.3 per cent in May and 0.5 per cent in June.
  • Exports fell by a whopping 30 per cent annualized in the quarter, while imports fell by 5 per cent, with the temporary boost provided by front-running of tariffs earlier in the year evaporating.
  • Employment fell by more than 100,000 positions in July and August, with full-time jobs held by people of prime working age bearing the brunt.
  • The unemployment rate hit 7.1 per cent in August, its highest since 2016, outside of the pandemic.
  • The fall in employment is dispersed widely across sectors, with nearly two-thirds of the sectors making up the Canadian economy experiencing contracting employment in the six months leading up to June.
  • Core inflation measures, such as CPI-trim and CPI-median, are still high at 3 per cent and 3.1 per cent year-over-year, respectively, but their three-month annualized rates of change are more subdued at 2.4 per cent and 2.6 per cent, respectively.
  • Services inflation, which drove core measures in the past, has slowed down from 3 per cent year-over-year in June to 2.8 per cent in both July and August.
  • Prime Minister Mark Carney's decision not to retaliate against U.S. tariffs will help bring inflation down further.
  • Non-residential business investment has contracted in six of the past eight quarters, suggesting that the productive capacity of the Canadian economy may be growing as slowly as aggregate demand.

Statistics:

  • Canadian economy contracted at an annualized pace of 1.6 per cent in the second quarter.
  • Exports fell by 30 per cent annualized in the quarter.
  • Imports fell by 5 per cent in the quarter.
  • Employment fell by more than 100,000 positions in July and August.
  • Unemployment rate hit 7.1 per cent in August.
  • Core inflation measures:

+ CPI-trim: 3 per cent year-over-year, 2.4 per cent three-month annualized.

+ CPI-median: 3.1 per cent year-over-year, 2.6 per cent three-month annualized.

  • Services inflation: 2.8 per cent year-over-year in July and August.
  • Non-residential business investment contracted in six of the past eight quarters.

Sources:

  • Bank of Canada. "Bank of Canada Cuts Overnight Rate Target and Depository Rate." [Date not specified].
  • The Globe and Mail. "Bank of Canada cuts interest rate to 2.5% amid economic slump." [Author not specified].

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