BOC Signals Pause to Meet Inflation Target

OTTAWA (Dow Jones) — The Bank of Canada cut its policy rate for the fourth time this year, to 2.25%, and signaled it might leave rates steady for the foreseeable future to aid an economy struggling under the weight of U.S. tariffs.

Bank of Canada Gov. Tiff Macklem warned of weak growth ahead for the economy — below 2% in 2026 and 2027 — as the fallout from U.S. trade policy becomes more tangible and companies shift to deal with the sudden change in the global economic backdrop. He said the labor market is soft, business investment and exports would remain weak, and spare capacity would persist through 2027. He added hefty U.S. tariffs of up to 50% on steel, aluminum, automobiles and lumber are “having severe effects” on key segments of the economy.

“If the economy evolves roughly in line with the outlook,” Macklem said, “the 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 central bank sets interest rates to achieve and maintain 2% inflation.

He added that rate policy can only do so much to contain the damage triggered by President Trump’s tariff policy. “Monetary policy can help the economy adjust as long as inflation is well controlled, but it cannot restore the economy to its pre-tariff path,” said Macklem, according to prepared remarks to be delivered at a press conference Wednesday morning.

Ten of 12 economists surveyed last week by The Wall Street Journal predicted a quarter-point cut from the Bank of Canada. With Wednesday’s reduction, the central bank’s main interest rate is now 2.75-percentage-points lower from 18 months ago. At 2.25%, the Bank of Canada’s main interest rate now sits at the low end of the central bank’s estimate for a neutral stance — or the point at which monetary policy neither reduces nor stimulates growth.

The central bank’s rate decision and accompanying forecast paint a dour portrait for the Canadian economy, which has relied on trade with the U.S. for one-fifth of its gross domestic product. Macklem said he expects data to show “very modest growth” for the second half of this year, with the pace of expansion picking up only gradually — to 1.1% in 2026 and 1.6% in 2027.

“The weakness we’re seeing in the Canadian economy is more than a cyclical downturn. It is also a structural transition,” Macklem said, adding trade friction has diminished the country’s prospects. The central bank estimates that the level of GDP will be about 1.5% lower than its expectations at the start of 2025. At current levels of nominal GDP, that represents a hit of more than $30 billion.

Economic weakness is keeping a lid on price increases, Macklem said. Nevertheless, he said, “the trade conflict is also adding costs for many businesses.” The central bank believes those factors should offset and keep inflation close to 2% through 2027.

Bank of Canada’s tepid outlook likely places increasing pressure on the federal Liberal government, led by former central banker Mark Carney, to provide a further boost to the economy through fiscal policy. Carney has promised bold measures in the government’s annual budget plan, set for release next week, to rekindle growth and position the economy to rely less on a protectionist White House.

The central bank’s outlook doesn’t incorporate anticipated measures to be contained in the federal budget plan. Its own forecast, which includes spending plans by provincial legislatures and federal measures released to date, does anticipate government expenditures to be a notable contributor to growth next year.