TORONTO – The Bank of Canada has made its first interest rate cut since March, lowering its benchmark rate by 25 basis points, from 2.75% to 2.5%. There were several reasons for Canada’s central bank’s decision, as explained today during a press conference held by the bank’s governor, Tiff Macklem, and deputy Carolyn Rogers.

Among the main reasons, there are the weakened economy due to the ongoing trade war with the United States, the latest GDP data, and the unemployment rate, which rose above 7% last month. Furthermore, inflation has remained relatively stable (as reported yesterday – here – it was 1.9% in August from 1.7% in July), with consumer and business inflation falling within the Bank of Canada’s target range of 1% to 3% annually.

“With a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks. Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity” the Bank wrote on its website (here), adding that “Governing Council is proceeding carefully, with particular attention to the risks and uncertainties. Governing Council will be assessing 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. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled” the Bank wrote in the statement on its website.

“Tariffs are weakening the Canadian economy — you can see that very acutely in the directly affected sectors” Macklem said. “The reality is tariffs are increasing trade friction with our biggest trading partner (the United States) that has efficiency costs, which monetary policy can’t undo. It can’t reverse that. What we can do is help the economy adjust while maintaining well-controlled inflation. That’s what we’re focused on…”. 

Macklem also said that based on current data, the economy is likely not heading for a recession, but that the next few months “are not going to be good” and he added that “we (the Bank of Canada) published three scenarios for the Canadian economy: one based on current tariffs, another one with an escalation of tariffs, and another with a de-escalation. If you take the current tariff scenario, which is roughly the tariff scenario we’re still in, we’re not expecting a recession” Macklem said to reporters, according to Global News (here the article). “Growth was clearly negative in the second quarter, we are expecting growth somewhere around one per cent in the second half of the year. So that is slow growth. It’s not going to feel good. It is growth, but it’s slow growth because the economy is adjusting to a different relationship with its biggest trading partner” and then he went on to say that the outlook could become more grim if there is an “escalation” in the trade war. “In the escalation scenario where there’s a significant escalation of tariffs, U.S. tariffs, then in that scenario, the Canadian economy does go into recession and certainly the situation would be worse” Macklem said.

In the pic above, Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers, yesterday (photo from Twitter X- @bankofcanada)