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At some point a central bank says it has gone far enough in cutting rates, and the Bank of Canada appears to be ahead of the pack in calling its quits. The BoC cut its policy rate by 25 bps today to 2.25%. More importantly, it clearly signaled that, short of a very serious weakening in the economy, investors should not expect any further rate cuts. The BoC has concluded that its current interest rate is just “ about at the right level”. The decision comes against a backdrop of an economy struggling to overcome the impact of US tariffs on key sectors, such as autos, steel, aluminum, and lumber . Yet, the underlying economy is not holding up well, to wit:

• The Canadian economy contracted by 1.6% in 2025 Q2 and overall GDP is expected to register a very anemic 1.2% for this year; 2026 and 2027 are not expected to be any better;
• Excess capacity,including labour and physical capital, is estimated as much as 1.5%;
• The national unemployment rate stands at 7.1% and is slightly higher inits industrial heartland of Ontario; hiring remains weak in trade-sensitive sectors and evidence is growing that AI is having a negative impact on hiring at all levels;
• The export sector is slumping badly as US -bound exports fell by 15% in 2025 Q2 ;
• Canada and the US have yet to reach any agreement on tariff reductions and the need for a comprehensive trade policy for North America. Worse yet, is the unpredictable behavior of President Trump and its resulting great uncertainty for the Canadian business world; and
• Real estate activity has entered a serious slump inmajor Canadian cities

With ongoing weakness, the BoC feels assured that there will be no uptick in the inflation. The BoC can safely lower rates today, knowing that inflation will be steady at 2%. That seems to be the easy part, but the real hard part is to improve the economy and that is, admittedly, beyond what the BoC can realistically accomplish.

At the press conference, Governor Macklem emphasized that interest rate reductions can help the demand side, but the real difficulties Canadians face are “structural” in nature. That is to say, US tariff policies are forcing businesses to look for future sales globally. The integration of the North American auto industry presents a host of complex supply management issues which are now tied into the uncertainty of US tariff policies .Next month, Canadians will be receiving their first national budget from the Carney government and then the spotlight will turn on the impact of fiscal policy on growth.

In many respects, the BoC has to make rate decisions while not knowing the outcome of major developments which are beyond their purview and influence . These includeUS tariff policy, Canadian government fiscal policy and shifting economic developments globally. The BoC acknowledges that “ this limits the role monetary policy can play to boost demand”. 

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