The Bank of Canada has cut its key interest rate to 2.25%, suggesting it is done cutting rates for the time being

The Bank of Canada cut interest rates to 2.25 per cent on Wednesday, but cautioned that monetary policy cannot fix the structural economic damage caused by the US trade war.

The central bank said it cut the rate by 25 basis points because the Canadian economy remains weak and inflation is expected to remain near the bank’s two per cent target.

“For many months we have been stressing that monetary policy cannot offset the damage caused by tariffs,” Bank of Canada Governor Tiff Macklem said in his opening statement.

“Increasing trade friction with the United States means our economy will operate less efficiently, with higher costs and lower income. Monetary policy can help adjust the economy as long as inflation is well controlled, but it cannot restore the economy to its pre-tariff path.”

The bank also indicated that if inflation develops broadly in line with expectations, hovering around its two percent target, it will keep rates at their current levels.

However, if attitudes change, “we are prepared to respond,” Macklem said.

Growth rate is expected to remain weak in the remaining part of the year

The bank outlined some economic conditions that influenced the decision to reduce rates.

The bank said Canada’s economy shrank in the second quarter as exports declined and trade uncertainty led businesses to invest less.

The labor market still appears weak and hiring has slowed, with thousands of jobs lost in vulnerable industries due to the US trade war.

Because the trade conflict is having a “severe impact” on tariff-hit sectors such as autos, steel, aluminum and wood, GDP is expected to weaken in the second half of the year, the bank said.

However, consumer spending has grown at a “healthy pace” and is expected to pick up by the end of the year along with real estate investment and government spending, the release said.

The bank said it expects inflation to remain close to its target in the coming months and inflationary pressures will also ease.

While price increases are slowing due to weak economic growth, tariff-related costs to businesses are weighing on inflation, and the Bank expects these two forces to offset each other.

Even though the bank has indicated that it has lowered rates for now, some economists still expect further cuts.

Robert Kavcic, a senior economist at BMO, wrote, “The Bank believes the easing date will provide support; inflation is steadily returning to 2 (percent); and the usefulness of monetary policy is somewhat limited in this unique economic environment.”

“That said, we believe the ongoing softness in the job market leaves the door open for some further support, and another 25 (basis points) rate cut for early 2026 is still on the table.”