The Bank of Canada lowered its key interest rate by 25 basis points to 2.25% on October 29. This suggests the end of its current round of rate cuts—so long as the economy continues to perform in line with its most recent projections.
“This was our second straight cut, and reflects ongoing weakness in the economy and contained inflationary pressures,” Governor Tiff Macklem said in his prepared remarks.
“If the economy evolves roughly in line with the outlook in our MPR (Monetary Policy Report), governing council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment.”
Weak growth outlook and tariff troubles
In its first baseline forecast since January, the central bank expects only a mild rebound following a contraction in the second quarter.
The Bank projects 0.5% annualized GDP growth in the third quarter and 1.0% in the fourth. Looking ahead, growth is expected to remain subdued at 1.1% in 2026 and 1.6% in 2027.
Trade tensions continue to weigh on Canada’s outlook. With U.S. tariffs still imposed on key exports, like steel, aluminum, softwood lumber and autos, the Bank estimates the average tariff rate on Canadian goods is now 5.9%.
While trade with Europe, China and other markets has picked up compared to 2024, these gains have not fully compensated for losses in exports to the United States.
At 2.25%, the policy rate now sits near the lower end of the Bank’s neutral range. Macklem told reporters that rates at this level should have a “stimulative effect” on the economy—but warned that the outlook remains uncertain.
“The range of possible outcomes is wider than usual — we need to be humble in our forecast,” Macklem said. “If the outlook changes, we are prepared to respond.”
The Bank’s latest projections also acknowledge that the ongoing trade conflict with the U.S. has left lasting scars. It now expects Canada’s GDP to be 1.5% lower by the end of 2026 than previously forecast in January 2025.
“This is more than a cyclical downturn,” Macklem noted. “The U.S. trade conflict has diminished Canada’s economic prospects. The structural damage caused by tariffs is reducing our productive capacity and adding costs.”
Economists expect a pause but not a finish
The rate cut was widely anticipated by analysts, who had already priced in further easing amid soft economic data. David Rosenberg, founder and president of Rosenberg Research & Associates Inc., said markets still see about a 40% chance of another cut by January.
“From my lens, the fact that the press conference contained a reference to any pickup being so tepid that it ‘implies excess supply is only taken up gradually,’ with the output gap remaining intact through 2027, is a telltale sign that the bank is not yet done,” Rosenberg wrote in a note to clients.
Sluggish job markets and population growth
The Bank expects business investment to keep falling through the remainder of 2025, largely due to persistent trade uncertainty. Even with lower borrowing costs, consumer spending is projected to grow only modestly amid weak job creation and slower population growth.
Canada’s unemployment rate rose to 7.1% in September, its highest level since 2016 outside of the pandemic. But with population growth now slowing, the Bank said fewer new jobs will be needed to stabilize employment rates.
“By the end of 2025, it is estimated that fewer than 5,000 jobs will need to be added each month to sustain the employment rate,” the report stated. “This compares with an average of 18,000 per month between 2000 and 2019, and more than 60,000 per month in the first half of 2024.”
Population growth is expected to decline to 1.5% in 2025, and further to 0.5% annually in 2026 and 2027.
Inflation trends and broader measures
Earlier this month, the Bank said it has started to monitor a broader range of indicators—beyond core inflation—to gauge underlying price pressures.
Although core inflation has remained near 3% the Bank estimates underlying inflation closer to 2.5%, and said momentum has been easing.
The outlook projects year-over-year core inflation at 3.2% in the third quarter and 2.9% in the fourth.
By late 2026, it is expected to ease to 2.3%, and reach 2.1% by the end of 2027. Headline inflation is forecast to be 2.0% by the end of 2025, before inching up to 2.2% in 2026.
Fiscal policy could influence next steps
The rate decision comes less than a week before the federal government’s upcoming November 4 budget, which Prime Minister Mark Carney has described as featuring “generational” investments designed to help Canada adapt to the evolving global trade environment.
“As we always do, we will take on board the new fiscal outlook in our projections,” Macklem said. “It’s going to be less about every specific measure, more about the add-up—how it fits together and what the implications are for both demand and supply in the economy.”
The Bank’s projections assume that tariff revenues collected by the federal government will be redistributed—partly to affected businesses and partly to households.
Andrew Hencic, senior economist at Toronto-Dominion Bank, said a pause in rate cuts would make sense in this environment.
“Prime Minister Mark Carney is expected to chart out a vision for the economy to offset some of the structural change the bank is unable to address,” Hencic noted in a report, adding that new fiscal measures could represent an upside risk to inflation.
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