BoC’s head previously emphasized the central bank would put more emphasis on potential risks
After much anticipation, the Bank of Canada (BoC) has reduced the overnight rate by 25-basis points for its October meeting, marking its second consecutive cut.
Current interest rates now sit at 2.25 per cent, the lower bound of what the BoC estimates is its neutral range.
"Because US trade policy remains unpredictable and uncertainty is still higher than normal, this projection is subject to a wider-than-usual range of risks. While the global economy has been resilient to the historic rise in US tariffs, the impact is becoming more evident. Trade relationships are being reconfigured and ongoing trade tensions are dampening investment in many countries,” the bank said in a statement.
This comes after the head of the BoC said the Bank would be “putting more emphasis on the potential risks when it decides what to do about interest rates later this month.”
"There is a lot of uncertainty, and we're going to have to be humble about our forecast," Macklem told reporters on a conference call from Washington on Oct. 17.
The decision also comes after a backdrop of mounting geopolitical friction and subdued domestic growth. Ahead of the central bank meeting, market participants were increasingly pricing in a second consecutive rate cut, following September’s 25-basis-point reduction to 2.5 per cent, the first easing move since March.
But there were some investors, like MFS' Soami Kohly who anticipated the Bank to hold, given Prime Minister's Mark Carney's recent speech around next month's budget proposal.
"Carney suggested that the budget deficit will grow as a result of policies, which are expected to promote housing and defense while attempting to grow Canadian exports to countries other than the US. He stressed the budget would cut wasteful spending as well," said Kohly, fixed income portfolio manager and investment officer at MFS Investment Management, in a statement to BPM.
"Given the likelihood of a larger than expected deficit in the next budget, it raises the prospects that the Bank of Canada will not cut interest rates next week. This would allow the Bank of Canada to see if the fiscal impulse can offset the weakness in the economy," he said.
As of last Friday, interest rate futures tracked by LSEG Data & Analytics indicated an 80 per cent probability of another quarter-point cut, amid deteriorating growth signals and fresh volatility in US-Canada trade relations.
US President Donald Trump abruptly cancelled bilateral trade talks last week in response to an Ontario government-funded ad campaign criticizing US tariff policy. In retaliation, Trump over the weekend signaled plans to impose an additional 10 per cent tariff on Canadian exports. Ontario Premier Doug Ford has since pledged to withdraw the ad campaign.
While Canada’s labour market surprised to the upside in September with a net gain of 60,000 jobs, the unemployment rate remained unchanged at 7.1 per cent. However, broader trends suggest limited momentum.
Year-to-date, job creation has been marginal, reflecting businesses' hesitancy to expand payrolls amid ongoing trade uncertainty and sluggish demand.
Real GDP contracted by 1.6 per cent in Q2, and preliminary indicators point to continued weakness in Q3. The looming federal budget, expected later this week, includes sizable infrastructure and productivity-related spending aimed at bolstering long-term economic resilience. Still, near-term growth risks remain elevated.
"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 Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval," said the bank in a release.
