Executive Summary: Bank of Canada's Monetary Policy Decision and Press Conference (September 17, 2025)
On September 17, 2025, the Bank of Canada (BoC), led by Governor Tiff Macklem, announced a 25 basis point cut to its policy interest rate, lowering it to 2.5%—the first reduction since March and the lowest in three years. The unanimous decision reflects a shift in focus from inflation risks to supporting a weakening economy amid U.S. tariffs and trade uncertainties. During the press conference, Macklem emphasised monitoring short-term risks and readiness to cut rates further if downside economic pressures intensify.
Key Economic Context and Rationale
Economic Slowdown and Trade Impacts:
Canada's GDP contracted by 1.6% in Q2 2025, driven by a 27% drop in exports to the U.S., declining business investment, and trade disruptions from tariffs on sectors like autos, steel, aluminium, and agriculture. Macklem noted that while consumption and housing showed resilience, slower population growth due to reduced immigration is curbing household spending and labor supply. Global growth is also softening, with U.S. consumer caution and China's weakening investment adding to uncertainties.Labor Market Weakness:
Employment fell by over 100,000 jobs in recent months, pushing the unemployment rate to 7.1%—a nine-year high (excluding COVID periods)—with job losses concentrated in trade-reliant sectors and easing wage growth. Macklem highlighted this as a key factor tipping the balance toward easing.Inflation Dynamics:
CPI inflation stood at 1.9% in August, with core measures around 3% and underlying inflation at 2.5%, showing diminished upward momentum. The removal of most retaliatory tariffs on U.S. imports has reduced upside risks, though supply chain shifts may still add costs. Macklem expressed less concern about reaccelerating inflation, prioritising economic support.
Future Outlook and Uncertainties
Policy Path:
The BoC remains data-dependent, with Macklem indicating flexibility for additional cuts—potentially in October or December—if labor market or growth risks worsen. Projections suggest slow growth around 1% in H2 2025, avoiding a recession but feeling sluggish due to trade frictions. The bank will assess the November 4 federal budget for fiscal implications.
Key Risks:
Persistent U.S. tariff threats, CUSMA review, geopolitical tariff use, and supply chain costs could exacerbate weakness, though recent tariff stability offers slight relief. Macklem stressed that monetary policy can't fully offset sector-specific tariff hits, advocating for fiscal tools.
Market and Broader Implications:
The cut aims to bolster growth and maintain price stability amid global upheaval, potentially easing borrowing costs for households and businesses. Economists anticipate at least one more cut by year-end, with markets pricing in a 48% chance for October.
Overall, the decision underscores the BoC's pivot to downside risks, balancing inflation control with economic support in a tariff-constrained environment.