Bank of Canada cuts rates to three-year low, cites risks to economy

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By Promit Mukherjee

OTTAWA (Reuters) – The Bank of Canada reduced its key policy rate to a three-year-low of 2.5% on Wednesday, the first cut in six months, citing a weak jobs market and less concern about underlying pressures on inflation.

The 25 basis point cut had been widely expected by markets. The BoC paused its easing campaign in March after reducing rates by a total of 225 basis points in nine months, starting in June last year.

Bank of Canada Governor Tiff Macklem said the damaging effect of U.S. tariffs meant considerable uncertainty remained.

“But 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 going forward,” he said in opening remarks to reporters.

“The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information,” he added.

The cut was a unanimous decision of the seven-member Governing Council, Macklem said. The last time the key rate hit 2.50% was in July 2022.

The economy initially held up reasonably well in the face of tariffs on some critical sectors.

But in the last two months, the job market has slumped, losing more than 100,000 positions. The unemployment rate is at a nine-year high, excluding the pandemic years.

The economy contracted in the second quarter by 1.6% and the outlook for the third quarter is weak.

“In the months ahead, slow population growth and the weakness in the labor market will likely weigh on household spending,” the bank said in a separate statement.

Money markets bets showed the odds of another rate cut at the central bank’s next rate decision on October 29 were roughly 48%.

The Canadian dollar steadied at about C$1.3760 to the U.S. dollar, or 72.67 U.S. cents after the rate cut, down 0.2% on the day.

Canada faces tariffs and duties from the United States and China, two of its biggest trading partners. Macklem said the direct impacts could spread into other parts of the economy.

Many businesses have told the BoC that they are pausing investment plans and are concerned that demand will weaken as the economic fallout broadens.

Macklem expressed less concern about a possible spike in inflation due to reduced rates even as the bank’s preferred measures of core inflation hover around 3%, the top end of its 1% to 3% target range.

A broader range of indicators continue to suggest underlying inflation is running around 2.5%, Macklem said, adding that Ottawa’s recent decision to remove retaliatory tariffs on many U.S. imports would cut inflationary pressures.

“Still, the disruptive effects of shifts in trade will add costs even as they weigh on economic activity,” he said. The Bank’s overall inflation target is 2%.

(Reporting by Promit Mukherjee; Editing by David Ljunggren)