Facing financial head winds and a contraction of the Canadian economy, the Bank of Canada cut its overnight interest rate by .25%, from 2.5% to 2.25%, the second cut in a row.“Canada’s economy contracted by 1.6% in the second quarter, reflecting a drop in exports and weak business investment amid heightened uncertainty,” said the bank in a statement on Wednesday morning. “US trade actions and related uncertainty are having severe effects on targetted sectors including autos, steel, aluminum, and lumber. As a result, GDP growth is expected to be weak in the second half of the year.” The bank added household spending grew, “at a healthy rate and the GDP will get some support from seasonal increases in consumer and government spending and residential investment and then pick up gradually as exports and business investment begin to recover.” Canada saw sizable job losses in July and August and despite gains in September, the labour market remains soft. "Job losses continue to build in trade-sensitive sectors and hiring has been weak across the economy. The unemployment rate remained at 7.1% in September and wage growth has slowed. Slower population growth means fewer new jobs are needed to keep the employment rate steady,” said the bank. .The effects of US tariffs are growing. “While the global economy has been resilient to the historic rise in US tariffs, the impact is becoming more evident. Trade relationships are being reconfigured and ongoing trade tensions are dampening investment in many countries,” said the bank, adding it in its monetary policy report projection, the global economy slows from about 3.25% in 2025 to about 3% in 2026 and 2027. Inflation was 2.4% in September, slightly higher than the bank had anticipated. “Inflation excluding taxes was 2.9%,” said the bank. “The preferred measures of core inflation have been sticky around 3%. Expanding the range of indicators to include alternative measures of core inflation and the distribution of price changes among consumer price index components (CPI) suggests underlying inflation remains around 2½%.” The Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon and signalled the new rate may be it’s last cut this year. .“With ongoing weakness in the economy and inflation expected to remain close to the 2% target, Governing Council decided to cut the policy rate by 25 basis points,” said the bank. “If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. If the outlook changes, we are prepared to respond. Governing Council will be assessing incoming data carefully relative to the Bank’s forecast.”
