Bank of Canada cuts interest rate to 2.5% as GDP shrinks, job market softens

Bank of Canada: For the first time since March, the Bank of Canada has lowered its key interest rate, cutting it by 25 basis points to 2.5% on Wednesday, as the country’s economy shows growing signs of strain.

Why the Bank of Canada Cut Rates: A Weakened Economy and Rising Job Losses

Governor Tiff Macklem pointed out in his opening remarks that the decision came after a series of economic developments that couldn’t be ignored: job losses, a slowdown in economic activity, and the federal government's removal of retaliatory tariffs against the US has reduced some "upside risk" to future inflation, as per a report.

He wrote that, "Considerable uncertainty remains. 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," as quoted by CBC News.


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Canada’s GDP Drops in Q2 as Business Investment and Exports Slow Down

Since July, the Bank has been keeping a close eye on several troubling trends. Macklem highlighted that the Canadian economy has seen a number of developments since July that influenced the bank's unanimous decision to cut rates, as reported by CBC News.

Canada's GDP shrank in the second quarter, businesses pulled back on investment, and exports to the US dipped largely because companies had already stocked up in anticipation of US tariffs, according to the report.

The governor explained that tariffs continue to have a "profound effect" on key Canadian industries, that includes, auto, steel and aluminum, as per CBC News. Even additional tariffs on copper and lumber and Chinese tariffs on canola, pork and seafood, have an impact, according to the report.

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Canada's Unemployment Rises to 7.1% with Over 100,000 Jobs Lost in Two Months

Another concern is the job market. Employment has dropped as the Canadian economy has also lost more than 100,000 jobs in just the past two months and the unemployment rate has increased to 7.1%, as per the CBC News report.

Macklem explained that along with significant job losses in tariff-exposed sectors, employers in other industries have even pulled back on hiring as uncertainty plagues the Canadian economy, as reported by CBC News.

He also pointed out that consumer spending was stronger than expected in the second quarter, but that could change as job market weakness weighs on Canadian households, as per the report.

FAQs

Why did the Bank of Canada cut interest rates?
Because the economy is slowing, job losses are increasing, and inflation pressures have eased, as per the CBC News report.

What’s the new BOC interest rate after the cut?
The Bank of Canada lowered the rate to 2.5%.