Bank of Canada cuts interest rate to 2.5% amid U.S. Trade war strains

The Bank of Canada cut its key interest rate by 25 basis points to 2.25 per cent on Wednesday, citing the deepening economic fallout from the U.S.-Canada trade war while warning that monetary policy cannot repair the structural damage caused by tariffs.

Governor Tiff Macklem, speaking at a news conference in Ottawa, said the move aims to help the economy adjust to the “new reality” of trade friction — but cautioned that lower rates cannot restore pre-tariff growth levels.

“For many months, we have been stressing that monetary policy cannot undo the damage caused by tariffs,” Macklem said. “Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income.”

The cut, expected by many economists, comes as Canada’s economy contracts, exports weaken, and business investment stalls amid uncertainty surrounding ongoing trade disputes with Washington. The central bank’s accompanying Monetary Policy Report noted that inflation remains close to the two per cent target, and that rate policy is now at a “roughly appropriate level” to maintain price stability.

The bank expects inflation to hover near two per cent through the end of the year, with tariff-related price pressures on imports offset by weak domestic demand. “If inflation evolves broadly in line with expectations, we’ll hold rates where they are,” Macklem said. “But if the outlook changes, we are prepared to respond.”

Pressed on what would constitute a “material change,” Macklem joked, “I’ll tell you when we see one,” before clarifying that the Bank would need “an accumulation of evidence” before adjusting rates further. The Bank of Canada said the ongoing trade conflict with the U.S. is “fundamentally reshaping” the Canadian economy. Tariff-affected industries — including autos, steel, aluminum, and lumber — are experiencing “severe effects,” with thousands of job losses and a marked slowdown in hiring. Canada’s GDP shrank in the second quarter, led by a drop in exports and business investment.

Despite this weakness, consumer spending and real estate investment continue to show strength, buoyed by lower borrowing costs and rising government expenditures. While the central bank signaled it may pause further cuts for now, some economists expect more easing ahead if labour market softness persists. “The Bank appears to believe the easing to date will offer support,” wrote Robert Kavcic, senior economist at BMO. “That said, the ongoing weakness in the job market leaves the door open for another 25-basis-point cut in early 2026.”

Ultimately, Macklem stressed that interest rate adjustments can only cushion the economy — not cure its deeper trade wounds. “Monetary policy can help the economy adjust as long as inflation is well-controlled,” he said. “But it cannot restore the economy to its pre-tariff path.” The message was clear: Canada’s central bank is walking a narrow line — trying to support growth without inflaming inflation, and navigating an international trade landscape that remains volatile, unpredictable, and largely beyond its control.