The Bank of Canada cut interest rates to 2.25 percent on Wednesday but warned that monetary policy could not reverse the structural economic damage caused by the U.S. trade war.
The central bank said it cut the rate by 25 basis points as the Canadian economy faces weakness and inflation is expected to remain close to the bank's target of two per cent.
“For months, we have stressed that monetary policy cannot offset the damage caused by tariffs,” Bank of Canada Governor Tiff Macklem said in his opening remarks.
“Increasing trade tensions with the United States mean our economy will operate less efficiently, with higher costs and lower revenues. Monetary policy can help the economy adjust as long as inflation is well controlled, but it cannot return the economy to the pre-tariff path.”
The bank also indicated that if inflation develops broadly in line with expectations, hovering around its two percent target, it will keep rates at current levels.
However, if the forecast changes, “we are prepared to respond,” Macklem said.
Growth is expected to remain weak until the end of the year
The bank outlined some economic conditions that influenced the decision to cut rates.
Canada's economy contracted in the second quarter, the bank said, as exports fell and businesses made fewer investments due to trade uncertainty.
The labor market remains weak and hiring has slowed, with thousands of jobs lost in industries vulnerable to the U.S. trade war.
With the trade conflict having a “severe impact” on industries such as autos, steel, aluminum and timber, GDP is expected to be weak in the second half of the year, the bank said.
However, consumer spending grew at a “healthy pace” and is expected to continue rising through the end of the year, along with real estate investment and government spending, it said.
The bank said it expects inflation to remain close to target in the coming months and inflation pressures to ease.
While weak economic growth is keeping prices down, business tariff costs are weighing on inflation, and the bank expects the two forces to offset each other.
Even though the bank says it is done cutting rates for now, some economists still expect further cuts.
“The Bank appears to believe that the current easing will be supportive; inflation is steadily returning to 2 [per cent]; and the usefulness of monetary policy is somewhat limited in this unique economic environment,” wrote Robert Kavcic, senior economist at BMO.
“However, we believe that continued weakness in the labor market leaves the door open for further support, and a further 25 [basis point] the rate is still under discussion for early 2026.”
