Decision follows weakening economic data
The Bank of Canada announced today that it will cut its key interest rate by 0.25 per cent to 2.50 per cent.
While the decision was widely expected in the immediate leadup to the scheduled announcement on Wednesday, it follows an extended pause in the central banks rate cutting cycle. Rates have been held steady since March of this year with announced holds citing a lack of clarity around the economic impact of US tariffs on Canadian inflation and GDP growth.
In the past month, new data has begun to reveal some of those impacts. GDP growth in Q2 was negative, largely dragged down by sharp declines in export volumes to the United States. Unemployment has risen while the economy has shed jobs. CPI has also not increased as much as expected in recent months. All these indicators appear to support a cut.
"After remaining resilient to sharply higher US tariffs and ongoing uncertainty, global economic growth is showing signs of slowing," the announcement reads. "Canada’s GDP declined by about 1½% in the second quarter, as expected, with tariffs and trade uncertainty weighing heavily on economic activity... In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending."
Economists from four of the big five banks had predicted a cut going into today's meeting, with RBC the only outlier. RBC economists Nathan Janzen & Claire Fan argued that the CPI print made the BoC's decision a "closer call" while predicting Governor Tiff Macklem would announce a hold. Other bank economists cited the relatively muted nature of the inflation report as supporting a cut.
"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," the announcement reads. "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."
