The Bank of Canada cut its interest rate by 25 basis points to 2.25 per cent on Wednesday, but signalled that it may end its easing cycle there if the economy operates in line with its latest forecast.

“This was our second straight cut, and reflects ongoing weakness in the economy and contained inflationary pressures,” said Bank of Canada governor Tiff Macklem, according to prepared remarks.

“If the economy evolves roughly in line with the outlook in our MPR (Monetary Policy Report), governing council sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy though this period of structural adjustment.”

The central bank presented its first baseline forecast since January after trade war uncertainty prompted policymakers to instead assess multiple potential scenarios in its reports earlier this year. After a contraction in the second quarter, the bank expects weak growth for the remainder of 2025, with 0.5 per cent annualized gross domestic product growth in the third quarter and one per cent growth in the last quarter of this year. It projects

GDP growth of 1.1 per cent in 2026 and 1.6 per cent in 2027. Watch the Bank of Canada press conference here With tariffs remaining in place on Canadian steel, aluminum, softwood lumber and autos, a decline in exports to the United States is expected to continue. The Bank of Canada estimates the average U.S. tariff rate on Canadian goods is now 5.9 per cent. While it noted that exports to the European Union, China and other parts of the world have increased compared to 2024, it said this diversification only partially offsets the weakness in trade with the United States.

At 2.25 per cent, the policy rate now sits at the lower bound of what the Bank of Canada estimates is its neutral range, where interest rates are neither stimulative nor restrictive. Macklem said Canadian businesses and households are feeling the consequences of U.S. protectionism and the continued uncertainty, which was highlighted again over the weekend with the breakdown in trade talks with the U.S. administration, and that policymakers are aware that numerous potential scenarios could unfold.

“The range of possible outcomes is wider than usual — we need to be humble in our forecast,” Macklem said. “If the outlook changes, we are prepared to respond.”

The trade war with the U.S. has put Canada’s economy on a permanent lower path of growth, with GDP estimated to be 1.5 per cent lower by the end of 2026 than what was expected in the central bank’s January 2025 MPR.

Macklem said the weakness in the Canadian economy is more than just a “cyclical downturn” but represents a structural transition, which will limit the ability of monetary policy to boost demand while maintaining low inflation.

“The U.S. trade conflict has diminished Canada’s economic prospects,” he said. “The structural damage caused by tariffs is reducing our productive capacity and adding costs.”

The bank expects business investment to continue to drop in the second half of this year, driven by trade uncertainty. Despite lower interest rates, consumption growth is expected to be modest, due to weak population growth and softness in the labour market.

Canada’s unemployment rate came in at 7.1 per cent in September, the highest since 2016, outside of the pandemic. However, the bank said the decline in population growth means fewer new jobs are needed for the employment rate to hold steady.

“By the end of 2025, it is estimated that fewer than 5,000 jobs will need to be added each month to sustain the employment rate,” the report said. “This compares with an average of 18,000 new jobs needed each month between 2000 and 2019, and more than 60,000 new jobs per month needed in the first half of 2024, when population growth was much higher.”

The bank expects population growth to be 1.5 per cent this year and slow to an average of 0.5 per cent in 2026 and 2027.

In a speech earlier this month, the central bank signalled that it is looking at a broader set of measures, in addition to core inflation, to determine where

underlying inflation stands . Measures of core inflation have hovered around three per cent, but the bank said underlying inflation remains around 2.5 per cent. Upward momentum on the bank’s core measures has slowed.

In the bank’s inflation outlook, the bank projects year-over-year core inflation to be 3.2 per cent in the third quarter and 2.9 per cent in the fourth quarter of this year. By the fourth quarter of 2026, the bank has core inflation falling to 2.3 per and to 2.1 per cent by the end of 2027.

Headline inflation is expected to be two per cent by the end of 2025, but then tick up to 2.2 per cent by the end of 2026.

  • Read the Bank of Canada’s official statement
  • Bank of Canada governor expects ‘soft’ growth in second half of 2025

The bank’s interest rate decision comes just a little under a week before the federal government is expected to table its budget on Nov. 4. Prime Minister Mark Carney has promised “generational” investments that will help the Canadian economy adapt to changing global trade landscape.

The central bank’s projection assumes that tariff revenues collected by the federal government to be remitted to affected businesses, and the remaining revenues to be redistributed to households.