Bank of Canada cuts policy interest rate at September meeting

  • First National Financial LP

The Bank of Canada announced today that it is reducing its benchmark interest rate to 2.50%, from 2.75%. This marks the first rate cut since March and reflects the Bank’s expert interpretation of current economic data and trending conditions.

We summarize the Bank’s observations and its outlook below.

Canadian economic performance and housing

  • Canada’s Gross Domestic Product declined by about 1.5% in the second quarter, as the Bank expected, with tariffs and trade uncertainty “weighing heavily” on economic activity
  • The Bank noted that exports fell by 27% in the second quarter, a sharp reversal from first-quarter gains when companies were “rushing orders” to get ahead of tariffs
  • Business investment also declined in the second quarter
  • Consumption and housing activity both grew at a healthy pace
  • In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending

Canadian inflation and outlook

  • Inflation measured by the Consumer Price Index (CPI) was 1.9% in August, the same as when the Bank issued its Monetary Policy Report in July
  • Excluding taxes, inflation was 2.4%
  • Preferred measures of core inflation have been around 3% in recent months, but on a monthly basis, the upward momentum seen earlier this year has dissipated
  • A broader range of indicators, including alternative measures of core inflation and the distribution of price changes across CPI components, continue to suggest underlying inflation is running around 2.5%
  • The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the US will mean less upward pressure on the prices of these goods going forward

Canadian employment and wages

  • Employment has declined in the past two months with job losses largely concentrated in trade-sensitive sectors, while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions
  • The unemployment rate has moved up since March, hitting 7.1% in August, and wage growth has continued to ease

Global economic performance

  • Global economic growth is showing signs of slowing after remaining resilient to sharply higher US tariffs and ongoing uncertainty
  • In the United States, business investment has been strong but consumers are cautious and employment gains have slowed
  • US inflation has picked up in recent months as businesses appear to be passing on some tariff costs to consumer prices
  • Growth in the euro area has moderated as US tariffs affect trade
  • China’s economy held up in the first half of the year but growth appears to be softening as investment weakens
  • Global oil prices are close to their levels assumed in the July
  • Financial conditions have eased further, with higher equity prices and lower bond yields
  • Canada’s exchange rate has been stable relative to the US dollar

Rationale for rate cut and outlook commentary

The BoC noted that with a weaker economy and less upside risk to inflation, it judged that a reduction in the policy rate was appropriate to better balance risks. Looking ahead, the Bank said that the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity. Governing Council said it is proceeding carefully, “with particular attention to the risks and uncertainties.”

The Bank also reported it will assess how exports evolve in the face of US tariffs and changing trade relationships; how much this spills over into business investment, employment, and household spending; how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices; and how inflation expectations evolve.

Final comments

The Bank concluded by saying it is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. It reassured Canadians that it will “support economic growth while ensuring inflation remains well controlled.”

Next scheduled BoC rate announcement

The Bank is scheduled to make its next interest rate announcement on October 29th. First National’s executive summary will follow that news. In the meantime, please visit the Resources page of this website for other important insights.

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