The softening labour market and the removal of most retaliatory tariffs were the cause
The Bank of Canada has announced its move to cut the key lending rate by 25 basis points, reaching 2.5%, according to BNN Bloomberg.
Serving as the first time the central bank issued cuts on the interest rates since March, the move had been expected by many private sector economists after Statista Canada’s inflation data marked the rise of consumer prices by 1.9% in August.
Tiff Macklem, the governor of the Bank of Canada, explained that the reasons behind the decision were the softening labour market as well as the removal of most retaliatory tariffs.
“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 of going forward,” said Macklem.
Notably, the country’s gross domestic product (GDP) was down by 1.5% in Q2 2025 following the US tariffs imposed on Canadian goods and trade uncertainty impacted Canada’s economic activity. Exports from the country also decreased by 27% in the same period following an increase in the previous quarter since many companies were rushing to get their orders in before the tariffs were set.
Macklem further noted the effect of the US tariffs on key sectors such as auto, steel, and the aluminium industry, adding that Chinese tariffs on canola, pork, and seafood were also impacting the growing uncertainty in the economy.
“The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the United States will mean less upward pressure on the prices of these goods going forward,” said Macklem.
Meanwhile, Canada’s unemployment rate rose to 7.1% in August, according to TD Stories. Macklem explained that sectors that were exposed to the tariffs had a great amount of job losses, with the economy losing more than 100,000 jobs within the last two months, according to Radio Canada International.
While Bank of Canada’s target range for inflation was between one and three percent, the overall inflation rate is currently at 1.9%.
“There is some more comfort that some of those upward pressures we saw on underlying inflation are coming off,” said Macklem.
The next interest rate decision of the central bank will be on Oct. 29.
