Commonwealth_ The Bank of Canada reduced its benchmark interest rate in response to increasing evidence that the global economy is decelerating. In its mid-September policy statement, the Bank lowered the key rate to 2.5 per cent from 2.75 per cent. The move lowered the bank rate from 3 per cent to 2.75 per cent and cut the deposit rate from 2.7 per cent to 2.45 per cent. The moves reflect the Bank’s awareness of mounting stresses on the Canadian and global economies in light of trade tensions and softening growth signals.
This decrease was largely attributed to Canada‘s slowing economic performance in the second quarter of 2025. During this period, the country’s Gross Domestic Product (GDP) experienced a 1.5% decrease. This decrease followed a few months of uncertainty in the global trade environment, largely because of tariffs that had been put in place by the Donald Trump administration in the United States. The uncertainty in trade policy had the biggest short-term effect on Canada’s export-based industries, with companies having to contend with surprise changes in cost and competitiveness at the global level.
One of the major events of the second quarter was a sharp 27 per cent fall in Canadian exports. This sudden decline was in sharp contrast to the previous quarter, during which export volumes had surged as businesses were racing to ship orders out ahead of new tariffs. As soon as those policies came into full effect, however, the reversal was swift and profound, leaving export-reliant industries to be particularly vulnerable. The impact was not limited to commerce alone; business investment declined in the same period, which was due to a more cautious approach by companies that were hesitant about future demand and policy stability.
The labour market’s performance has mirrored Canada’s economic problems. Since the Bank’s last rate decision at the end of July, the nation has experienced an increase in unemployment. The job losses have been new and have been concentrated in sectors most sensitive to global commerce, underscoring the ripple effect of trade tariff disputes on job security. Increased unemployment has heightened Canada’s economic vulnerability and accelerated the Bank’s pursuit of growth by reducing borrowing costs.
The government of Canada has proceeded to ease some of the economic pressures by removing a significant portion of its retaliatory tariffs on the United States. The move is expected to release upward pressure on domestic prices as it will reduce the cost of imported goods. The Bank of Canada expects the change in policy to soften inflationary pressures that were building up as a result of earlier tariff wars. While inflation is far from crisis levels today, the Bank remains aware of its possible impact on consumer spending and overall economic health.
The international environment has also played a considerable role in the Bank’s recent action. The economic situation in the United States, Canada’s largest trading partner, is sending conflicting signals. Investment by U.S. companies has been generally sound, suggesting that there are still areas of growth. But American consumers have been increasingly cautious in their purchases, a reflection of concern over rising costs and uncertainty with global trade. Employment growth south of the border is also moderating, raising questions about the durability of the U.S. economic boom. U.S. inflation has accelerated over the past few months, much because companies are paying consumers a bill by passing on higher costs through tariffs. This development has introduced some degree of uncertainty to the overall North American economic environment.
With its decline in interest rates, the Bank of Canada aims to create better financial conditions for the business community and consumers. Lower borrowing costs are intended to encourage businesses to reinvest and expand, as well as grant consumers the convenience of accessing credit for large purchases. This decision is a step in the view of the Bank to shield the Canadian economy from combined shocks of sagging exports, reduced investment, and rising unemployment.
Overall, the Bank of Canada’s rate cut is a pre-emptive action to contain growing risk in a volatile global economy. The step underscores the degree to which trade tensions and tariff policy have disrupted economic stability in Canada and globally. While the Bank remains cautious in its projection, there can be no question that monetary policy will continue to be a major contributor to efforts to spur growth, preserve jobs, and cushion Canadian families against further shocks in the months ahead.
