Viewpoint: The Bank of Canada decision — last call

The Bank of Canada decision — last call

As was widely expected, the Bank of Canada (BoC)’s policy-setting Governing Council decided today to reduce the overnight rate target by a further 25 basis points to 2.25%.

What was less certain, however, was what the forward guidance, if any, would look like. Recall that in September¹, the BoC dropped the previous comment² that “there may be need for a reduction in the policy interest rate” in favour of more noncommittal language.

In the event, the BoC was surprisingly explicit, with the statement accompanying today’s decision³ (reproduced below for ease of reference) stating that the “Governing Council sees the current policy rate at about the right level” should the economy progress as expected in their new set of forecasts, released simultaneously today in the Monetary Policy Report⁴ (MPR; these include a baseline outlook rather than a range of estimates for the first time since January). Given that markets were pricing at least one more 25-basis-point reduction in the policy rate, bond yields are adjusting higher across the curve, while the Canadian dollar has firmed versus its peers.

Digging into the meat of today’s communications, the BoC acknowledges that U.S. trade policy remains a headwind for the Canadian economy as well as a key source of uncertainty, with the now cumulative 100 basis points of cuts since the start of the year aimed at helping support the domestic economy through the “structural transition” in the relationship with Canada’s largest trading partner.

At the same time, while remaining “unpredictable”, the BoC acknowledged that the impact of U.S. policy on Canadian economic growth and inflation is becoming clearer (hence the comfort in going back to the old practice of producing baseline forecasts rather than scenarios in the MPR). Growth is viewed on a lower track than otherwise would be the case, while inflation is firmer, but the BoC also noted that slower population growth will mean fewer jobs will be needed to keep the unemployment rate steady.

Importantly, though, that the slowing is due to “structural” factors rather than “cyclical” ones, “limits the ability of monetary policy to boost demand while maintaining low inflation,” as per Governor Macklem’s press conference opening statement⁵. Additional rate cuts may not stimulate growth but could stoke inflation, which is not ideal for a central bank whose sole stated objective⁶ is to “achieve and maintain price stability”.

From the BoC’s lens, the “opposing forces” acting on inflation are expected to “roughly offset” and keep inflation close to the 2% target over the forecast horizon. Accordingly, the policy prescription would be for neither a stimulative nor a restrictive stance, and today’s cut leaves the rate at the bottom of the assumed range⁴ for the nominal neutral interest rate of 2.25% to 3.25%.

For sure, there is a willingness to ease policy further should downside surprises materialize for growth or U.S. trade policy (“If the outlook changes, we are prepared to respond…”), but, for the time being at least, it appears the BoC has reached the end of its easing cycle.

Bank of Canada overnight rate target
(percent)

Shaded regions represent periods of US recession; source: Guardian Capital, based on data from the Bank of Canada to October 29, 2025

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David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.

Bank of Canada lowers policy rate to 2¼%

FOR IMMEDIATE RELEASE | Media Relations | Ottawa, Ontario

October 29, 2025

The Bank of Canada today reduced its target for the overnight rate by 25 basis points to 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

With the effects of US trade actions on economic growth and inflation somewhat clearer, the Bank has returned to its usual practice of providing a projection for the global and Canadian economies in this Monetary Policy Report (MPR). Because US trade policy remains unpredictable and uncertainty is still higher than normal, this projection is subject to a wider-than-usual range of risks.

While the global economy has been resilient to the historic rise in US tariffs, the impact is becoming more evident. Trade relationships are being reconfigured and ongoing trade tensions are dampening investment in many countries. In the MPR projection, the global economy slows from about 3¼% in 2025 to about 3% in 2026 and 2027.

In the United States, economic activity has been strong, supported by the boom in AI investment. At the same time, employment growth has slowed and tariffs have started to push up consumer prices. Growth in the euro area is decelerating due to weaker exports and slowing domestic demand. In China, lower exports to the United States have been offset by higher exports to other countries, but business investment has weakened. Global financial conditions have eased further since July and oil prices have been fairly stable. The Canadian dollar has depreciated slightly against the US dollar.

Canada’s economy contracted by 1.6% in the second quarter, reflecting a drop in exports and weak business investment amid heightened uncertainty. Meanwhile, household spending grew at a healthy pace. US trade actions and related uncertainty are having severe effects on targeted sectors including autos, steel, aluminum, and lumber. As a result, GDP growth is expected to be weak in the second half of the year. Growth will get some support from rising consumer and government spending and residential investment, and then pick up gradually as exports and business investment begin to recover.

Canada’s labour market remains soft. Employment gains in September followed two months of sizeable losses. Job losses continue to build in trade-sensitive sectors and hiring has been weak across the economy. The unemployment rate remained at 7.1% in September and wage growth has slowed. Slower population growth means fewer new jobs are needed to keep the employment rate steady.

The Bank projects GDP will grow by 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027. On a quarterly basis, growth strengthens in 2026 after a weak second half of this year. Excess capacity in the economy is expected to persist and be taken up gradually.

CPI inflation was 2.4% in September, slightly higher than the Bank had anticipated. Inflation excluding taxes was 2.9%. The Bank’s preferred measures of core inflation have been sticky around 3%. Expanding the range of indicators to include alternative measures of core inflation and the distribution of price changes among CPI components suggests underlying inflation remains around 2½%. The Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon.

With ongoing weakness in the economy and inflation expected to remain close to the 2% target, Governing Council decided to cut the policy rate by 25 basis points. If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. If the outlook changes, we are prepared to respond. Governing Council will be assessing incoming data carefully relative to the Bank’s forecast.

The Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.

¹ Bank of Canada, Press Releases, Bank of Canada lowers policy rate to 2½%, September 17, 2025, https://www.bankofcanada.ca/2025/09/fad-press-release-2025-09-17/
² Bank of Canada, Press Releases, Bank of Canada holds policy rate at 2¾%, July 30, 2025, https://www.bankofcanada.ca/2025/07/fad-press-release-2025-07-30/
³ Bank of Canada, Press Releases, Bank of Canada lowers policy rate to 2¼%, October 29, 2025, https://www.bankofcanada.ca/2025/10/fad-press-release-2025-10-29/
⁴ Bank of Canada, Publications, Monetary Policy Report, Monetary Policy Report—October 2025, October 29, 2025, https://www.bankofcanada.ca/publications/mpr/mpr-2025-07-30/section-8/
⁵ Bank of Canada, Press Speeches and appearances, Monetary Policy Report Press Conference Opening Statement, October 29, 2025, https://www.bankofcanada.ca/2025/10/opening-statement-2025-10-29/
⁶ Bank of Canada, Core functions, our main areas of responsibility, October 29, 2025, https://www.bankofcanada.ca/core-functions

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Published: October 29, 2025