The Bank of Canada cut its overnight rate by .25% on Wednesday, taking it down to 2.5%.
In a statement, the bank’s governors cited Canada’s resilience to sharply higher US tariffs and a world-wide economic slowdown as informing its decision.
On the home front, the bank said, “Canada’s GDP declined by about 1.5% in the second quarter, as expected, with tariffs and trade uncertainty weighing heavily on economic activity.
Exports fell by 27% in the second quarter, a sharp reversal from first-quarter gains when companies were rushing orders to get ahead of tariffs. Business investment also declined in the second quarter.
Consumption and housing activity both grew at a healthy pace. In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending.”
A decline in Canadian employment levels over the course of the summer was also a factor in the cut.
"Job losses have largely been concentrated in trade-sensitive sectors, while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions,” said the bank in its statement. “The unemployment rate has moved up since March, hitting 7.1% in August, and wage growth has continued to ease.”
Inflation was also a factor.
“CPI inflation was 1.9% in August. Excluding taxes, inflation was 2.4%. Preferred measures of core inflation have been around 3% in recent months, but on a monthly basis the upward momentum seen earlier this year has dissipated,” said the bank.
“A broader range of indicators, including alternative measures of core inflation and the distribution of price changes across CPI components, continue to suggest underlying inflation is running around 2.5%.
The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the US will mean less upward pressure on the prices of these goods going forward.”
The rate cut was also a hedge on what the bank is expecting in the coming months.
“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,” said the bank.
“Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity. Governing Council is proceeding carefully, with particular attention to the risks and uncertainties.”
"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.”