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Banks (Finance)

Bank of Canada Keeps Interest Rate Steady, Ending Easing Cycle Amid Trade Uncertainty

Strategic Insights

— 2 min read

As the Canadian economy faces significant challenges due to U.S. tariffs and protectionism, the Bank of Canada has kept its benchmark interest rate steady at 2.25 per cent, signaling that it is at the end of its easing cycle. Governor Tiff Macklem stated that the policy rate is now "at about the right level to keep inflation close to 2 per cent while helping the economy through this period of structural adjustment." The bank has been lowering borrowing costs nine times since the summer of 2024, but now acknowledges that monetary policy has limited ability to address the trade shock that is changing the Canadian economy's structure.

Key Takeaways:

  • The Bank of Canada has cut its benchmark interest rate by a quarter-percentage-point to 2.25 per cent, the fourth cut this year.
  • The bank estimates that Canada's gross domestic product will be about 1.5 percentage points smaller by the end of next year than it would have been without the trade war.
  • Governor Tiff Macklem stated that the policy rate is now "at about the right level to keep inflation close to 2 per cent while helping the economy through this period of structural adjustment."
  • Mr. Macklem emphasized that monetary policy cannot target hard-hit sectors like aluminum, steel, and autos, and cannot help companies find new markets or reconfigure their supply chains.
  • The bank sees GDP growing by around 0.75 per cent in the second half of the year, then rising slightly to 1.1 per cent in 2026 and 1.6 per cent in 2027.
  • U.S. tariffs have already had a major impact on the Canadian economy, with exports plunging and job losses concentrated in industries hit by sector-specific tariffs.
  • The bank's governing council voted to lower the policy rate, with a unanimous decision encouraging investors to reassess their expectations.

Statistics:

  • The policy rate has been cut nine times since the summer of 2024.
  • The bank estimates that Canada's gross domestic product will be about 1.5 percentage points smaller by the end of next year than it would have been without the trade war.
  • Annual Consumer Price Index inflation was 2.4 per cent in September, with core inflation measures running around 3 per cent.
  • The bank expects inflationary pressures to ease in the months ahead, with upward momentum in inflation dissipating.
  • The odds of another rate cut in December are less than 10 per cent, with no additional cuts priced in next year, according to LSEG data.

Sources:

  • Globe and Mail, "Bank of Canada keeps interest rate steady, ending easing cycle amid trade uncertainty" (no date provided)
  • Canadian Imperial Bank of Commerce, "Bank of Canada cuts rate, signals end of easing cycle" (no date provided)
  • LSEG, "Bank of Canada rate cut: what it means for the economy" (no date provided)
  • Bank of Canada, "Statement by the Governor" (no date provided)

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