After an extended ‘wait and see’ period, the Bank of Canada decided it was time to resume its rate cutting this morning.

The decision to trim its policy rate by 25 basis points to 2.5% did not shock us, and most others in our line of work. It was our call.

With today’s cut - the first since March - the Bank is confident that enough progress is being made on inflation as it deals with the now-apparent negative effects of the trade war.  

• As we reported yesterday, headline inflation has cooperated, falling below 2% in each of the last five months. Core inflation is more sticky, but the Bank said today that too may be improving.  
• Meanwhile, the Canadian economy has cooled (GDP shrank 1.6% in 2025Q2) and the labour market has weakened (unemployment at 7.1% in August - highest since 2016 outside of the pandemic).

Stateside, the U.S. Federal Reserve is widely expected to cut its policy rate later today - not because of inflation progress (it’s around 3%), but because of a darkening employment picture. 

We don’t have a new forecast from the Bank (that will need to wait until October), so we are left dissecting the statement and press conference remarks for any clues as to what’s next. 

I interpret some of the comments as dovish. Most notably, the note of “less upside risk to inflation” in the forward looking statement. Further, the Bank specifically references the dropping of Canadian counter-tariffs as a disinflationary force, and that upward momentum on core inflation in recent months has “dissipated".

Lean on me - murky outlook means more data dependance

The Bank of Canada has emphasized that it’s a particularly tough time to forecast due to trade uncertainty (we get it). In July, they presented not so much forecasts, but scenarios. 

With such a murky outlook, the default position is to lean more heavily on the incoming data. Expect the upcoming reports on CPI, GDP and employment before the October announcement to carry extra weight.

From the press conference: “The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information” [emphasis ours].

Our current call is that the Bank of Canada will cut one more time this year by 25 basis points, but we wouldn’t rule out two more cuts in the final two meetings if inflation cooperates. 

Almost there - the big rate cuts are behind us

This announcement does not change our view that the Bank of Canada is almost done cutting. It’s already in the ‘neutral’ range of 2.25-3.25%.

Governor Tiff Macklem has also been clear since the outset of the trade war that he’s not coming to the rescue with aggressive and deep cuts. Tariffs add to price pressures, even as the economy slows.The BofC has to thread that needle. 

Further, just because short term rates fall doesn’t mean long term rates follow. Five-year government bond yields have already come down (2.73% Sept 16 vs. 3.13% July 15). Even as the policy rate falls, rates on longer term debt “will be challenged to fall significantly”, as Mark Johnson from our rates desk put it over the summer.

The bottom line is that repairing the economy will need to be done outside monetary policy levers. At the moment, all eyes are on fast-tracking major projects and the need to build productive stuff in Canada. 

Answer to the previous trivia question: The Tragically Hip song “Fiddler’s Green” features the line “September 17, for a girl I know it’s Mother’s Day.” Gord Downie wrote the song in memory of his sister’s son who died of a heart condition.

Today’s trivia question: Who is the oldest player on the Toronto Blue Jays’ roster?