Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The Bank of Canada cuts its policy rate by 25bp to 2.25%, as expected.
The overall message from today’s decision is that US tariffs have had a sizeable permanent negative impact on the Canadian economy. However, as the BoC has repeatedly stated, monetary policy has a limited role in offsetting the impact of US tariffs on the economy. Moreover, with inflation expected to remain consistent with the target, the Governing Council judges that the current policy rate is appropriate, suggesting that further cuts are unlikely unless the economy weakens.
Overall, we continue to believe another cut will likely be required, as we believe that, while the economy is no longer deteriorating, growth will remain weaker than the BoC expects. Moreover, as we have mentioned on many occasions, we estimate that the neutral rate in Canada is likely lower than the BoC estimates (see Searching for the terminal rate). However, today’s message for the BoC suggests that the threshold for a rate cut at the next meeting might be high, and that the next rate cut may be delayed until early 2026.
The BoC cut its policy rate by 25 bp to 2.25%, as widely expected. The Bank’s communication states that the decision “reflects ongoing weakness in the economy and contained inflationary pressures.” However, the central Bank added that “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.”. This suggests that, unless the economy weakens further, the BoC does not see a need for another rate cut.
As such, the BoC continues to remind observers that there is little monetary policy can do to offset the impact of US tariffs, saying, “the Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation.”
The BoC notes that “while the global economy has been resilient to the historic rise in US tariffs, the impact is becoming more evident”. As a result, the central Bank forecasts global economic growth to slow in 2026 and 2027.
It notes that, in the US, “economic activity has been strong, supported by the boom in AI investment. At the same time, employment growth has slowed and tariffs have started to push up consumer prices.” Elsewhere, China’s exports to the US are lower, but offset by higher exports to other countries, while business investment in the country weakened.
On the Canadian economy, the BoC says that the economic contraction in 2025Q2 was due to “a drop in exports and weak business investment amid heightened uncertainty” and that “US trade actions and related uncertainty are having severe effects on targeted sectors including autos, steel, aluminum, and lumber”. The Bank also notes that consumer spending has been resilient and should be a source of support for growth, alongside government spending and residential investment, in the second half of 2025.
The BoC expects the labour market to remain soft. It notes that job losses continue to build in trade-sensitive sectors and hiring has been weak across the economy”.
On inflation, the BoC notes that headline inflation was “slightly higher than the Bank had anticipated” in September. The BoC adds that when considering a broader range of measures of core inflation and the breadth of inflationary pressures, inflationary pressure are withing the target band. The Bank “expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon.”
For the first time since January 2025, the Bank of Canada provided a projection, expecting 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027. The details show that the Bank expect the Canadian economy to avoid a recession, with some marginally positive growth in 2025Q3. However, the impact of the US tariffs will be permanent, reducing the level of economic activity by 1.5%. While growth is expected to improve in 2026, “excess capacity in the economy is expected to persist and be taken up gradually.” On inflation, “the Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon.”
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this