The Bank of Canada (BoC) has joined its American counterpart in yesterday reducing its base lending rate by 25 basis points to 2.5% with the Bank Rate at 2.75% and the deposit rate at 2.45%.

Yesterday, the US Federal Reserve lowered its benchmark interest rate by 25 basis points, bringing the federal funds target range to 4.00 to 4.25 per cent.  This marks the first rate cut for the year and comes as the Feds moves to stabilise a wobbling labour market, even as US President Donald Trump’s tariffs continue to push up prices. 

With a weaker economy and less upside risk to inflation, the BoC’s Governing Council judged that a reduction in the policy rate is appropriate to better balance the risks. Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity. 

Proceeding carefully 

The Governing Council is proceeding carefully with particular attention to the risks and uncertainties. It will assess how exports evolve in the face of US tariffs and changing trade relationships; how much this spills over into business investment, employment, and household spending; how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices; and how inflation expectations evolve.

The BoC is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval, promising to support economic growth while ensuring inflation remains well controlled. The rate cut comes against the backdrop that Canada’s exchange rate has been stable relative to the US dollar.

Economic faltering 

In addition the economy declined by about 1½% in the second quarter, as expected, with tariffs and trade uncertainty weighing heavily on economic activity. Exports fell by 27% in the second quarter, a sharp reversal from first-quarter gains when companies were rushing orders to get ahead of tariffs. 

Business investment also declined in the second quarter. Consumption and housing activity both grew at a healthy pace. In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending. 

Employment has declined in the past two months, as  job losses have largely been concentrated in trade-sensitive sectors, while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions. The unemployment rate has moved up since March, hitting 7.1% in August, and wage growth has continued to ease.