Weaker Canadian Economy, End of Counter-Tariffs Led to Interest Rate Cut: Bank of Canada

Canada’s weakening economy and the lifting of retaliatory tariffs on goods from the United States contributed to the Bank of Canada’s decision to cut its interest rate, the bank says.

The Bank of Canada released a summary of deliberations by its governing council that led to the decision to cut the rate to 2.5 percent from 2.75 percent on Sept. 17.

The document said three developments over the summer led the council to decide it was the right time to drop the rate. First, the economy was weakening and the labour market softening. Second, there were indications that upward pressure on inflation was easing. Third, with most retaliatory tariffs against the U.S. lifted, the risk of higher-than-expected inflation eased.

“In reviewing all these factors, Governing Council judged that the balance of risks had shifted in favour of cutting the policy rate,” the summary said. “The economy was weaker and, while there were still some mixed signals, inflationary pressures appeared more contained.”

The council noted that the economy contracted in the second quarter due to tariffs and trade uncertainty, adding that exports had declined by 27 percent, while growth in business investment was negative.

“Businesses reported that they are in a wait-and-see mode, given the unpredictability of US trade policy,” the summary said.

The central bank also looked at recent inflation data, released a day before the rate drop announcement.

Numbers from Statistics Canada showed that the consumer price index (CPI) rose 1.9 percent on a year-over-year basis in August, up from 1.7 percent in July.

The CPI measures the increase in price that consumers pay for goods and services, which is an indication of inflation.

Council members “agreed that the latest inflation data indicated that upward momentum in core inflation seen earlier in the year had dissipated.”

However, “members stressed that while the upside risks had diminished, they had not gone away. Trade disruptions implied new costs. How big these costs would be, when and where they might materialize, and what they could mean for inflation all remained uncertain.”

The summary also noted that with the removal of counter-tariffs on U.S. goods, there wasn’t a “significant risk” that consumers would see higher prices due to tariffs. It also noted that lower input costs from labour, shipping, and materials would “likely mean lower inflationary pressures going forward.”

Council members said that given the “relative stability” of U.S. tariffs since July, they expect to be able to give an inflation and growth forecast in the October Monetary Policy Report.

The bank is expected to announce its next interest rate decision on Oct. 29, releasing its Monetary Policy Report at the same time.

Bank of Canada Governor Tiff Macklem told reporters at the time of the announcement that while monetary policy is unable to reverse the impacts of U.S. tariffs that are “weakening” Canada’s economy, it can help the economy adjust to the impacts while keeping inflation low.

He said that if the risks shift, “we’re prepared to take action, and if the risks tilt further, we’re prepared to take more action,” adding that the bank would “take it one meeting at a time.”

Matthew Horwood and The Canadian Press contributed to this report.