Bank of Canada drops interest rate to 2.5%, citing economic slowdown

The Bank's governing council said the reduction was appropriate to balance the risks posed by a softer economy and less upward pressure on inflation. The target for the overnight rate is now 2.5 per cent, with the Bank Rate at 2.75 per cent and the deposit rate at 2.45 per cent.

Weaker economic conditions

The central bank's decision comes amid signs of an economic slowdown both at home and abroad. Canada's GDP contracted by roughly 1.5 per cent in the second quarter, largely due to tariffs and ongoing trade uncertainty. Exports saw a sharp 27 per cent decline in the same period, a reversal from the first quarter's rush to beat tariffs. Business investment also fell.

While consumption and housing activity have remained relatively healthy, the Bank expects slow population growth and a weak labour market to weigh on household spending in the coming months. The unemployment rate has risen to 7.1 per cent as of August, with job losses concentrated in trade-sensitive sectors.

Global and inflation context

Globally, economic growth is showing signs of slowing, even as financial conditions have eased with higher equity prices and lower bond yields. The U.S. has seen business investment remain strong, but consumer caution and slowing employment gains are noted. U.S. inflation has also picked up, with some businesses passing on tariff costs to consumers.

In Canada, consumer price index (CPI) inflation was 1.9 per cent in August, unchanged from July. Core inflation measures, which strip out volatile components, have hovered around 2.5 per cent. The recent removal of most retaliatory tariffs on imported goods from the U.S. is expected to ease some price pressures.

The Bank's governing council will be closely monitoring how exports and business investment evolve in the face of U.S. tariffs and changing trade relationships. The next interest rate announcement is scheduled for October 29.