Bank of Canada Cuts Rates to 2.25%, Says Borrowing Costs Are “About Right”

The Bank of Canada has cut its key interest rate by 25 basis points to 2.25%, marking the second consecutive reduction as the central bank grapples with the ongoing impact of U.S. tariffs on the Canadian economy.

Governor Tiff Macklem said the rate cut aims to support the economy through a period of trade-related strain but emphasized that interest rates are now “about at the right level” to keep inflation close to 2% — provided economic conditions unfold as expected.

“If the outlook changes, we are prepared to respond,” the Bank said in its policy statement.

Economic Growth Downgraded

In its latest Monetary Policy Report, the central bank downgraded Canada’s growth forecast, expecting the economy to expand by only 1.2% in 2025 and 1.1% in 2026, down from previous projections of 1.8%. The outlook for 2027 shows a modest recovery to 1.6% growth.

Macklem described the trade dispute with the United States as a “structural transition” that has diminished Canada’s economic prospects. He added that the economy is now 1.5% smaller than forecasted earlier this year and warned of persistent headwinds from weak exports, low investment, and a slowing job market.

Cautious Approach to Further Cuts

Despite the sluggish outlook, policymakers signaled reluctance to add further stimulus, citing concerns that additional rate cuts could fuel inflationary pressures.

The Canadian dollar strengthened, reaching $1.3915 per U.S. dollar, its strongest level since early October, while government bond yields rose. Markets also scaled back expectations for another rate cut in December.

Economists say the Bank’s move reflects a difficult balancing act — supporting a slowing economy without reigniting inflation.

“There’s nothing to cheer about here,” said Warren Lovely of National Bank Financial. “We’re lowering interest rates because the economy is under immense strain.”

Inflation and Neutral Rate

While inflation remains “sticky” near 3%, the Bank expects it to stay close to the 2% target through 2027. The current 2.25% policy rate sits at the bottom end of the neutral range, meaning borrowing costs neither stimulate nor restrict growth.

With U.S. tariffs still weighing heavily on trade, Macklem admitted that forecasts carry a “wider range of uncertainty than usual,” underscoring the fragile state of Canada’s post-pandemic recovery.