By Promit Mukherjee and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada signaled on Wednesday an end to its cutting cycle after trimming its key overnight interest rate to 2.25%, but Governor Tiff Macklem said he would be ready to respond if Canada’s economic outlook changed materially.
The 25-basis-point cut, the second in a row, brings the rate down to the lowest since July 2022.
Macklem said the easing was designed to help the economy deal with the disruption from U.S. tariffs while keeping inflation close to the bank’s 2% target.
In January, the bank had forecast the economy would grow by 1.8% in both 2025 and 2026. But, citing U.S. trade policy, it now says growth in 2025 will be just 1.2%, dropping to 1.1% in 2026, before recovering to 1.6% in 2027.
“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,” the bank said in its rate announcement.
Economists said while rate cuts have paused for now, there could be more easing in the next year.
“Though it’s still unclear how the balance of risks between inflation and growth plays out, the policy rate needs to be lower as excess capacity in the economy remains wide,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce.
Macklem, however, said the bank would need to see evidence of a materially altered economic outlook to respond further.
“We recognize there’s a lot of uncertainty out there, and if the outlook changes we’re prepared to respond,” he said.
Macklem said while the trade war was depressing demand, it had also added costs for many businesses. The bank expected these forces to offset each other, he told reporters.
Canada’s economy contracted in the second quarter by 1.6% and early indicators suggest it might barely avoid another contraction in the third quarter.
“The weakness we’re seeing in the Canadian economy is more than a cyclical downturn. It is also a structural transition,” Macklem said, adding this limited the ability of monetary policy to boost demand while keeping inflation at 2%.
The bank sees annualized growth of 0.5% in the third quarter and 1% in Q4. It returned on Wednesday to the practice of issuing detailed quarterly economic forecasts after suspending them in March due to economic uncertainty.
The BoC aims to keep the rate of annual inflation anchored at 2%, the mid-point of its 1% to 3% target range.
