NextFin news, The Bank of Canada announced it will reduce its key interest rate by 25 basis points on Wednesday, September 17, 2025, in Ottawa, as the Canadian economy shows signs of significant weakness. This move marks the resumption of the central bank's easing cycle after a summer pause.
Ali Jaffery, an economist at CIBC Capital Markets, stated that Canada's economic conditions justify a stronger case for rate cuts compared to the United States, where the Federal Reserve is also preparing to lower rates but under different economic circumstances. Jaffery noted that Canada has moved deeper into economic slack with a real-time output gap near -1.5%, approaching recession territory.
Recent data highlights the economic challenges: Canada lost 65,500 jobs in August, pushing the unemployment rate to 7.1%, the highest in nine years outside the pandemic period. Additionally, the country's GDP contracted by 1.6% in the second quarter, impacted by U.S. tariffs on Canadian exports such as steel, aluminum, and automobiles.
Governor Tiff Macklem of the Bank of Canada is expected to adopt a forward-looking monetary policy approach, focusing less on past data and more on future economic conditions. Inflation is currently near the bank's target, with headline inflation at 1.7% in July and expected to rise slightly to 2.0% in August due to base effects. Core inflation measures remain steady, and some earlier inflationary pressures, including counter-tariffs and a weaker Canadian dollar, have reversed.
The Bank of Canada is likely to leave open the possibility of further rate cuts later this year, especially if upcoming inflation data shows no significant increase. This decision comes amid a challenging global economic environment and limited near-term fiscal policy support.
Meanwhile, the U.S. Federal Reserve is also expected to cut rates this week, primarily to bring policy closer to neutral rather than to address urgent economic weakness. The U.S. labor market shows some slowing, but unemployment remains near the Fed's long-term estimate, and wage growth has accelerated.
Financial markets have reacted to these expectations: U.S. mortgage rates fell to 6.35%, their lowest in nearly a year, and Canadian bond yields have declined, with the five-year Government of Canada yield dropping to around 2.70%. This has led to lower fixed mortgage rates in Canada, with some five-year terms now below 4%, prompting lenders such as RBC to reduce rates.
A Reuters poll conducted last week found that nearly 80% of economists expect the Bank of Canada to cut rates by 25 basis points on Wednesday, with many anticipating at least one more cut before the end of 2025. However, some economists, including Derek Holt of Scotiabank, caution against moving too quickly, warning that excess supply conditions and inflation uncertainties require careful consideration to avoid undershooting the inflation target.
Overall, the Bank of Canada's rate cut on Wednesday reflects the central bank's response to a weakening Canadian economy characterized by job losses, GDP contraction, and inflation near target, while the U.S. Federal Reserve's rate cut is motivated by different economic factors.
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