OTTAWA — The Bank of Canada cut its benchmark interest rate by a quarter point on Wednesday as the central bank worries less about inflation risks and more about a slowing economy.

The central bank’s policy rate now stands at 2.5 per cent, breaking a streak of three consecutive holds since March.

Governor Tiff Macklem said the risks have shifted since the bank’s last interest rate decision in July.

Cracks in the labour market and a sharp drop in exports are threatening growth, he said, while earlier signs of underlying inflation pressure are fading.

“With a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks,” he told reporters after the rate decision Wednesday.

The Bank of Canada signalled it will keep looking on a shorter horizon than usual as it tries to set monetary policy in a constantly shifting environment.

Macklem said the bank is ready to adjust its policy rate again if warranted.

“We’ve demonstrated today, if the risks tilt, if the risks shift, we’re prepared to take action,” he said. “And if the risks tilt further, we are prepared to take more action. But we’re going to take it one meeting at a time.”

Annual inflation stood at 1.9 per cent in August, Statistics Canada reported Tuesday, with core inflation figures holding around three per cent year-over-year.

But the Bank of Canada, looking at a broader range of indicators, still sees underlying inflation holding at around 2.5 per cent.

Macklem also said the federal government’s decision to drop most retaliatory tariffs against the United States at the start of this month will take some fuel out of price growth.

He said counter-tariff impacts were most noticeable in food in recent months, but said that with the removal of those measures, prices should fall back in affected areas going forward.

The national unemployment rate meanwhile rose to 7.1 per cent after Canada’s economy shed more than 100,000 jobs across July and August. Real gross domestic product fell 1.6 per cent annualized in the second quarter.

Economists expect employers were rushing to get ahead of U.S. tariffs in the first quarter, pulling forward activity and driving the second-quarter contraction.

Macklem reiterated that the central bank does not currently have a recession baked into its outlook, calling instead for modest growth of roughly one per cent in the second half of the year.

“It’s not going to feel good. It is growth, but it’s slow growth,” he said.

While there are still a lot of unknowns tied to U.S. tariffs and the global trade disruption, Macklem said “near-term uncertainty may have come down a little.”

If the tariff situation with the United States remains steady, he said the central bank will likely return to publishing a single, central forecast for the economy at its next monetary policy decision on Oct. 29.

CIBC senior economist Katherine Judge said in a note to clients Wednesday that the economy is “losing resilience” and inflation should remain well contained moving forward.

She argued that will set the central bank up for another cut at its October decision.

Financial markets were placing odds of another quarter-point cut next month at just over 40 per cent as of noon Wednesday, according to LSEG Data & Analytics.

Monetary policymakers will be looking at how export activity evolves and whether costs from the trade disruption are passed on to consumers as it gauges where to take the policy rate next.

Stephen Brown, deputy chief North America economist at Capital Economics, said the Bank of Canada’s focus on inflation expectations and the ways the trade dispute could spill over into household activity are telling.

“That leaves the door to another interest rate cut this year if, as we expect, economic growth remains weak while core inflation pressures remain under control,” he said.

The Bank of Canada’s next rate decision will come before the federal government’s long-awaited fall budget, which Finance Minister François-Philippe Champagne announced Tuesday would come on Nov. 4.

The Liberal government has announced a series of spending items since the spring election, including plans to rapidly ramp up defence and infrastructure spending while trimming operational costs.

Macklem said the bank is waiting until there’s a complete budget where it can see how those individual plans fit together, rather than adjusting monetary policy now.

“Once we have the budget, we will be assessing the implications of the government’s plans on the economic outlook, what that means for growth, for inflation and ultimately for what we need to do with interest rates,” he said.

Macklem reiterated that he believes fiscal policy is better suited to handle the sector-specific impacts of U.S. tariffs, while the Bank of Canada’s interest rate can smooth the broader hit from the ensuing shifts in the economy.

“Monetary policy can’t undo the effects of tariffs. The most it can do is try to help the economy adjust at a macro level while keeping inflation well controlled,” he said.

Senior deputy governor Carolyn Rogers suggested the central bank would assess the November budget at its final rate decision of the year in December.

This report by The Canadian Press was first published Sept. 17, 2025.