The Bank of Canada cut its benchmark interest rate by a quarter point Wednesday and signalled it may be satisfied with where the policy rate sits amid ongoing U.S. trade uncertainty.
The central bank’s key rate now stands at 2.25 per cent after a second consecutive cut.
Bank of Canada governor Tiff Macklem said in prepared remarks that monetary policymakers feel the policy is at “about the right level” to keep inflation close to the bank’s two per cent target while supporting the economy through tariff disruptions – provided the economy evolves in line with its expectations.
Economists widely expected Wednesday’s cut as Canada’s economy shows cracks from U.S. tariffs but inflation appears largely under control.
Macklem said the central bank is expecting the pressures pushing inflation higher – costs related to tariffs, for example – will be largely offset by a weaker economy going forward.
The Bank of Canada returned to publishing a central forecast for the economy and inflation Wednesday, a practice it had foregone since January as tariffs clouded its outlook.
“It has now been six months since we have been living with U.S. tariffs. And while U.S. trade policy remains unpredictable, its impacts are becoming clearer,” Macklem said.
After the economy contracted in response to a sharp drop in exports in the second quarter, the bank now sees modest annualized GDP growth of 0.5 per cent this quarter and one per cent in the fourth quarter.
The forecasts show growth will likely be restrained in the next two years, averaging 1.4 per cent, as population growth slows and Canadian exporters attempt to diversify beyond the U.S. market.
The central bank expects trade disruptions will structurally reduce the size of Canada’s economy and forecasts GDP will be 1.5 per cent lower by the end of 2026 than its projections before U.S. tariffs were imposed earlier this year.
Macklem noted that U.S. tariff policy remains “unpredictable.” He made a brief reference to U.S. President Donald Trump’s decision over the past week to abruptly halt trade talks with Canada over an Ontario ad campaign and threatened to impose an extra 10 per cent tariff on Canadian goods.
This environment means the Bank of Canada can’t put as much stake in its forecasts as usual.
“The range of possible outcomes is wider than usual – we need to be humble about our forecast. If the outlook changes, we are prepared to respond,” Macklem said.
-The Canadian Press-
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