Bank of Canada Cuts Interest Rate to 2.5%

In a move widely anticipated by markets, the Bank of Canada cut its benchmark overnight interest rate by 25 basis points to 2.5% on Wednesday, citing growing economic strain from U.S. trade tariffs and signs of labor market softening. 

The cut marks the central bank’s first rate adjustment since March and reflects mounting concerns over both domestic and cross-border headwinds.

The decision, announced after the central bank’s policy meeting, was backed by a “clear consensus” within the governing council, according to Bank of Canada Governor Tiff Macklem, who said the rate move was aimed at "better balancing future risks" amid a weakening economic outlook.

“With the economy slowing and inflation risks easing, the council judged that a rate cut was appropriate,” Macklem said in a written statement.

The rate cut comes as Canada’s economy shows signs of strain from recently imposed U.S. tariffs, which have hit key Canadian exports and triggered concerns over broader economic fallout. While the Bank did not explicitly tie the rate move to trade tensions, analysts say the economic damage caused by escalating trade frictions, particularly from Washington, was a clear factor.

Officials highlighted a continued deterioration in the Canadian labor market, with slowing job creation and increased layoffs in export-sensitive sectors. The manufacturing and energy industries, in particular, have felt the brunt of the trade headwinds.

Adding a political twist, Prime Minister Mark Carney recently revoked retaliatory tariffs on select U.S. goods, a move aimed at easing tensions and helping reduce import-related inflation. Bank officials welcomed the decision, noting that it eliminated a potential inflation driver.

Despite today’s action, the central bank offered no clear guidance on future interest rate paths, choosing instead to emphasize a data-driven approach amid continued uncertainty. Unlike the U.S. Federal Reserve, which signaled multiple rate cuts this year, the Bank of Canada adopted a more cautious tone, avoiding forward commitments.

“The outlook remains highly uncertain,” Macklem said, adding that the Bank will “closely monitor” evolving risks before considering further easing.

Markets had largely priced in a 25 basis-point reduction, with some traders even betting on a larger 50-point cut in line with expectations for the U.S. Federal Reserve. However, the Bank of Canada opted for a more conservative approach, maintaining room to maneuver in the event of further economic shocks.

Canada’s decision follows a growing global trend toward monetary easing as central banks grapple with post-pandemic inflation normalization, slowing growth, and geopolitical risks,  including trade disputes and ongoing instability in key regions.

As North American supply chains remain tightly linked, economists warn that Canada may face additional spillover effects from U.S. monetary and trade policy in the months ahead.