NextFin news, OTTAWA — The Bank of Canada cut its benchmark interest rate by 0.25 percentage points to 2.5% on Wednesday, October 1, 2025, responding to signs of a weakening Canadian economy and the recent removal of most retaliatory tariffs against the United States.
Governor Tiff Macklem announced the decision after the central bank’s governing council assessed that the risks to economic growth had shifted since the last rate decision in July. The move breaks a streak of three consecutive rate holds since March.
“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,” Macklem said during a news conference in Ottawa.
The Bank of Canada highlighted cracks in the labour market, including a rise in the unemployment rate to 7.1%, and a sharp drop in exports as key concerns threatening growth. The economy contracted in the second quarter of 2025 as U.S. tariffs took full effect.
Macklem noted that earlier signs of persistent inflation pressures appear to be diminishing. The federal government’s decision to drop most retaliatory tariffs at the start of October is expected to ease price growth, particularly in food sectors that had been most affected.
Despite the challenges, the central bank forecasts modest economic growth of about 1% in the second half of the year, describing it as “slow growth” that will not feel robust.
The Bank of Canada also signaled it will continue to monitor economic conditions closely and is prepared to adjust the policy rate further if warranted. “We’ve demonstrated today, if the risks tilt, if the risks shift, we’re prepared to take action,” Macklem said. “And if the risks tilt further, we are prepared to take more action. But we’re going to take it one meeting at a time.”
Some economists, including Nathan Janzen, assistant chief economist at RBC, expressed skepticism about the rate cut, citing strong consumer spending that could sustain inflationary pressures. Janzen suggested that fiscal policy might be better suited to address sector-specific impacts of trade disruptions rather than monetary policy.
Macklem agreed that monetary policy cannot undo the effects of tariffs but can help the economy adjust at a macro level while keeping inflation under control.
The Bank of Canada’s next rate decision is scheduled before the federal government’s fall budget announcement on November 4, 2025. The central bank will incorporate fiscal policy developments into its economic forecasts following the budget.
Financial markets currently assign a probability of just over 40% to another quarter-point rate cut at the October 29 meeting, reflecting ongoing uncertainty about inflation, labour market conditions, and trade impacts.
Source: The Canadian Press, MoneySense, MSN, October 2, 2025.
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