BOC cuts key interest rate by 25bps

Before the meeting, we viewed the case for easing as mixed and leaned narrowly toward expecting a hold. However, as the Bank of Canada highlighted, evidence since its July meeting — including a softer labor market, weaker net trade in Q2, and some moderation in core inflation (though still above the 2% target) — was enough to shift the balance toward a rate cut.

The overnight rate has been lowered to 2.5%, bringing it close to the lower bound of the BoC’s estimated neutral range of 2.25%–3.25% (roughly equivalent to a “neutral gear” in a car, where the economy is neither accelerating nor slowing).

In its decision, the BoC acknowledged that economic weakness remains concentrated in a handful of trade-sensitive sectors, and monetary policy has limited power to offset those effects. At the same time, it flagged risks to broader domestic spending in the months ahead as the labor market cools and population growth slows.

Forward guidance was deliberately restrained, with Governor Macklem stressing the bank will respond to incoming data “over a shorter horizon than usual.” That stance gives policymakers unusual flexibility, appropriate given today’s volatile and uncertain backdrop.

We believe further easing is probable. The BoC made clear its concerns about the economic outlook, and historically it has rarely adjusted rates only once when initiating or resuming policy shifts. Still, future cuts are not assured if labor market conditions stabilize or inflationary pressures reemerge.