Trade tensions with the United States weigh on economic growth, prompting rate cut
Today, the Bank of Canada announced that it has cut the overnight lending rate by 25 basis points to 2.5%. This marks the first rate cut since March.
With softness taking hold in the labour market and trade tensions with the US choking economic growth, the Governing Council opted to lower the cost of borrowing.
“At this rate decision, there was clear consensus to lower our policy rate for the first time since March. We will continue to assess the impacts of tariffs and uncertainty on economic activity and inflation. We are paying close attention to how exports evolve given the impact of US tariffs and changing trade relationships; how much this spills over into business investment, employment and household spending; how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices; and how inflation expectations evolve,” said Tiff Macklem, Governor of the Bank of Canada, in a press conference with reporters following the announcement.
Canada’s Consumer Price Index (CPI) rose 1.9% year over year in August, up from 1.7% in July. The uptick was mostly due to gasoline prices.
“We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled,” said Macklem.
Rate cut could support burst of fall market activity
After a subdued spring, Canada’s major housing markets saw modest gains in activity over the summer. With borrowing costs now lower, the fall season – traditionally one of the busiest times of the year for real estate – could see a stronger pickup in buyer activity.
According to the latest Royal LePage® Home Price Update and Market Forecast, the aggregate price of a home in Canada eased upwards modestly in the second quarter of 2025, increasing 0.3% year over year to $826,400. On a quarter-over-quarter basis, the national aggregate home price decreased by 0.4%.
“In a departure from its recent holding pattern, the Bank of Canada has resumed cutting its overnight lending rate. While inflation is holding at the Bank’s target, a softening Canadian labour market tipped the balance toward further rate relief this time around,” said Phil Soper, president and CEO of Royal LePage.
“The effects of Canada’s tariff dispute with the United States became evident over the summer, with layoffs rising in August and job losses concentrated in trade-dependent industries, such as warehousing and manufacturing. Though inflation remains under control, this latest cut underscores the Bank’s efforts to support broader economic stability,” noted Soper. “For the housing market, lower borrowing costs should stimulate some fresh momentum heading into the fall, traditionally the second-busiest season for home sales. In higher-priced regions like Ontario and British Columbia, this may be the catalyst that encourages more buyers to re-enter the market in the months ahead.”
The Bank of Canada will make its next interest rate announcement on Wednesday, October 29th.
Read the full September 17th report here. Want to know more about how the overnight lending rate works? Read our explainer on how the Bank of Canada uses this financial tool.