Bank of Canada delivers second consecutive cut to key interest rate, lowering it to 2.25%

The BoC is likely to return with another rate cut later in 2026, according to strategists from Mackenzie Investments and IG Wealth Management.

“With markets pricing around a 30-35 per cent probability of one more cut by the second quarter of 2026, we believe there are enough risks around the Canadian macro economy, housing market reset, USMCA and slowing inflation, that at least one or more cuts are likely in the first half of 2026,” said Dustin Reid, chief strategist of fixed income at Mackenzie Investments.

Philip Petursson, chief investment strategist at IG Wealth Management, says the BoC’s tone suggests today’s rate decision is more of a pause than the end of a cycle.

“Investment is weak, exports are suffering from slow U.S. demand due to tariffs, and consumption is softening,” he said.

“If inflation data confirms the slowdown, another rate cut would not be surprising.”

With its declaration that the overnight rate is “at about the right level” to keep inflation in check and help the economy through a “period of structural adjustment,” the BoC “acknowledges quite clearly that this might be it for rate cuts, for now,” says BMO economist Robert Kavcic.

Weak economic growth, soft employment and ongoing uncertainty all helped the case for today’s cut, Kavcic writes. The limitations of monetary policy, the need for a fiscal response from government, and inflation tracking to cool off from a September uptick are collectively “setting up a pause from here.”

Nonetheless, Kavcic says there are some reasons to think a possibility of additional rate relief remains: “We believe that ongoing softness in the job market leaves the door open for some further support, and another 25 bp rate is still on the table for early-2026.”

Real estate data firm CoStar Group Canada says the BoC is ready to hold rates steady after today’s cut.

“One major implication is that for Canada’s struggling real estate sector, the road to a recovery this time may not be driven by extremely cheap borrowing costs, which was largely the driver of this sector over the past decade,” chief economist Carl Gomez wrote in an email following the Bank’s decision.

“We have long argued that this easing cycle would be different than past emergencies such as the GFC (great financial crisis) and COVID, where the Bank cut rates to zero.”

Governor Tiff Macklem expects economic growth to be “very modest” for the rest of the year.

The BoC expects only half a percentage point of growth (0.5 per cent) in Q3 and 1 per cent in Q4 — noting Q3 is “pretty close to zero.”

“Whether it’s Q3, Q4, small positives, small negatives, they’re not going to feel very good,” he said. “This is pretty modest growth, even in our forecast.”

However, he notes that the BoC is not forecasting a sharp “downdraft” in the economy, marked by a big rise in the unemployment rate, which is typical of recessions.

The BoC’s support to consumption and housing will continue to contribute to growth, along with government spending, Macklem says.

Where weakness is expected in the near term is in exports and business investment.

BoC governor Tiff Macklem says less efficient trade with the United States will ultimately mean a lower standard of living in Canada.

“Increased trade friction with the United States means our economy will work less efficiently with higher costs and less income,” he told reporters in Ottawa on Wednesday. “Unless something else changes, our incomes will be lower.”

“Unless we change some other things, our standard of living as a country, as Canadians, is going to be lower than it otherwise would have been,” Macklem added.

“We need to get our productivity growth up, and if we can do that as a country, we can bend that curve up.”

TD Bank economist Andrew Hencic says it’s “reasonable” to assume the BoC will move to the sidelines following today’s 25 basis point rate cut. However, he says, more uncertainty is virtually certain.

“Stabilization at 2.25 per cent is our base case on where the policy rate will hold, but we acknowledge that risks abound,” Hencic wrote in a research note on Wednesday. “The Bank is now at the bottom end of its estimated neutral range, and a pause is reasonable.”

“The outlook is replete with uncertainty,” he added. “Not least because CUSMA (Canada-United States-Mexico Agreement) negotiations are set to ramp up next year.”

“While trade represents a downside risk to the outlook, the upcoming federal budget could well represent the upside risk.”

The role of monetary policy in the current situation is somewhat limited, BoC governor Tiff Macklem said this morning.

“It’s more than a cyclical downturn, it’s a structural change,” he said.

“The U.S. has swerved to protectionism. It’s harder to do business with the U.S.”

Businesses are now left looking for new markets and they’re reconfiguring their supply chains, which all add costs, he says.

Monetary policy can’t target specific sectors like aluminum, steel and autos, and it can’t help companies find new markets.

“What it can do is it can try to mitigate the spillovers from the hard-hit sectors to the rest of the economy, and it can try and help the economy adjust to this structural change,” Macklem added.

The Bank of Canada’s rate cut could restore some confidence among first-time homebuyers, but affordability remains a hurdle, says Rishard Rameez, CEO and co-founder of real estate startup Zown.

“Confidence tends to return before affordability does, and that shift in sentiment can gradually thaw activity in what’s been a frozen segment of the market,” he said.

“The key question now is whether optimism can hold if prices start rising faster than incomes through the next year.”

Robert Saunders, CEO and co-founder of Ownright, another real estate startup, says lower rates may spark momentum in some smaller markets, but are unlikely to improve confidence in Toronto and Vancouver due to the ongoing tariff war and high unemployment rates.

“Buyers are still contending with a soft job market and resale activity has flattened while new construction is being driven by rentals, not ownership.”

The BoC’s largely downbeat assessment of Canada’s economy on Wednesday sets high expectations for stimulus measures in the upcoming federal budget, says Karl Schamotta.

The chief market strategist at payments firm Corpay says Governor Tiff Macklem’s prepared remarks include a “clear handoff to the government.”

“The weakness we’re seeing in the Canadian economy is more than a cyclical downturn,” Macklem stated on Wednesday.

“It is also a structural transition. The U.S. trade conflict has diminished Canada’s economic prospects. The structural damage caused by tariffs is reducing our productive capacity and adding costs,” he added. “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.”

Canada’s federal budget is due to be released on Nov. 4.

Following today’s rate cut, the Bank of Canada appears to be “moving back onto the sidelines” to consider incoming data, the impact of next week’s federal budget and the progression of trade discussions, according to Andrew Grantham, senior economist at CIBC.

“On our base case assumptions that the economy starts to gradually recover, and that a trade deal is reached to lower some sectoral tariffs and reduce uncertainty surrounding CUSMA, today’s move would be the final one,” he said.

However, further cuts would be justified if the economy continues to soften or if the outlook for trade doesn’t improve.

The MPR returns to a single base case, but the document notes that ongoing uncertainty around trade and the economic impact of tariffs means “risks around the base-case forecast are particularly elevated.”

“The Canadian economy is adjusting to steep U.S. tariffs on several industries and coping with elevated uncertainty. Tariffs have led to a fall in the demand for Canadian goods, affecting the broader economy.”

The Bank says this “structural shift in the Canada-U.S. trade relationship has put the economy on a lower path,” with GDP projected about 1.5 per cent lower by the end of 2026 than forecast in January. Roughly half of the downgrade comes from weaker potential output due to trade-driven structural changes, the rest from soft demand.

“Growth in gross domestic product (GDP) is projected to strengthen from around 0.75 per cent in the second half of 2025, with annual growth averaging 1.4 per cent over 2026 and 2027.”

The recovery is expected to be slow “because Canadian businesses need time to adjust to the new trade reality and a weak labour market is weighing on household spending.” Population growth is also assumed to “remain low.”

“Inflation is projected to decline from 2.4 per cent in September and settle around 2 per cent in early 2026. It remains there throughout the projection horizon.”

Tariffs and restructuring “are raising costs and supporting inflation,” but “excess supply dampens inflation.” On balance, the Bank expects total CPI to stay close to target, while “underlying inflation has continued to be about 2.5 per cent.”

“Consumer spending growth is projected to average approximately 1.5 per cent over 2026 and 2027… much slower than the 2.8 per cent in 2025.”

The Bank cites “slow growth in household incomes,” weaker labour markets and “muted population growth.” Business investment “remains subdued mainly due to reduced U.S. demand for Canadian exports” and persistent uncertainty, though modest improvement is expected by 2027.

Today’s 25 basis point rate cut from the Bank of Canada probably isn’t enough pep up the housing market, according to the mortgage comparison website Rates.ca

“While an overnight rate decrease is welcome news for floating variable rate mortgage holders, homeowners up for renewal in the coming months and some would-be homebuyers, it may not be enough to spur significant movement in the housing market,” says Rates.ca mortgage and real estate expert Victor Tran.

“In many regions, we’ve seen housing price declines of 10 to 20 per cent, but those prices are still expensive for many as income levels haven’t kept pace with initial housing price increases. That said, for those that are able to purchase now, conditions are favourable for buyers. Especially those that plan to live in the home for the foreseeable future.”

Economists recently told Yahoo Finance Canada that housing market is not moving in lockstep with the Bank of Canada’s interest rate decisions.

Rates.ca says for every 25 basis point decrease, floating variable rate mortgage holders can expect to pay approximately $15 less per $100,000 of mortgage in monthly mortgage payments.

The Canadian Chamber of Commerce says today’s 25bp rate cut sends a harsh message about the state of the economy.

“An interest rate of two and a quarter percent isn’t free candy in this environment. The Bank of Canada’s decision to lower rates signals persistent economic concern as tariffs continue to be layered,” principal economist Andrew DiCapua stated in an email.

“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,” he added.

The Canadian Chamber of Commerce is a lobby group representing over 200,000 businesses across Canada.

The Bank of Canada lowered its policy rate to 2.25 per cent in an effort to prioritize economic support over inflation containment, according to Ashish Dewan, senior investment strategist at Vanguard Canada.

“The removal of retaliatory tariffs, declining mortgage interest costs and growing economic slack are expected to exert downward pressure on inflation,” Dewan said.

“Meanwhile, rents are likely to ease as a result of increased supply from purpose-built rental developments and a slowdown in population growth.”

In this context, the BoC opted to look past the recent monthly uptick in CPI to 2.4 per cent in September, he added.

“The weakness we’re seeing in the Canadian economy is more than a cyclical downturn. It’s also a structural transition. The U.S. trade conflict has diminished Canada’s economic prospects. The structural damage caused by tariffs is reducing our productive capacity and adding costs.”

“Even as growth recovers, the entire path for GDP is lower than it was before the shift in U.S. trade policy. By the end of 2026, the level of GDP is about 1.5 per cent lower than forecast in January.

“U.S. trade policy remains unpredictable, as events over the weekend reminded us. There continues to be considerable uncertainty, both about U.S. tariffs and their impacts. The range of possible outcomes is wider than usual—we need to be humble about our forecast. If the outlook changes, we are prepared to respond.”

“Canadian businesses and households are feeling the consequences of increased U.S protectionism. It is difficult, and ongoing uncertainty is compounding the difficulty. For many months, we have been stressing that monetary policy cannot undo the damage caused by tariffs. Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income. 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.”

The BoC notes that its preferred core measures of inflation, CPI-median and CPI-trim, “have been sticky around three per cent.”

“Expanding the range of indicators to include alternative measures of core inflation and the distribution of price changes among CPI components suggests underlying inflation remains around 2.5 per cent.”

The BoC says it “expects inflationary pressures to ease in the months ahead,” with CPI to remain around two per cent through 2027.

Here are the latest data the Bank of Canada has to guide its interest rate decision this morning.

For several months now, gas prices have played a central role in monthly inflation data because of the removal of the carbon tax. Fuel prices in September were down from the year before, but the gap wasn’t as wide as it was in August — with September inflation rising as a consequence.

CPI: 2.4 per cent (up from 1.9 per cent in August)

CPI-median: 3.2 per cent (unchanged from August)

CPI-trim: 3.1 per cent (up from 3 per cent in August)

Economists had expected flat or negative job growth in September, but Canada instead recorded fairly robust net job gains. Unemployment remained elevated.

Jobs: Net gain of 60,400 positions in September

Unemployment rate: 7.1 per cent (unchanged from August)

Canada’s economy grew 0.2 per cent in July, after shrinking in the three months prior.

July GDP: Up 0.2 per cent from June (economists had expected a 0.1 per cent gain, according to Reuters)