The Bank of Canada (BoC) is betting on cheaper credit reviving a slowing economy further hit by trade shock. It cut the overnight rate at today’s meeting, a move widely expected as exports fall, investment retreats, and the labour market softens. The central bank hopes easing will support demand and jumpstart investment—but does history support that assumption?
Bank of Canada Slashes Rates To Support Demand
The BoC cut its key policy interest rate by 25 basis points (bps) to 2.50% at this morning’s meeting. The move was widely expected, bringing the overnight rate to its lowest level in 3 years—though still above its pre-pandemic level. The decision follows signs of economic erosion, particularly in trade and investment.
“The Council decided to lower the policy rate to support demand and to keep inflation close to target over the medium term,” explained the BoC.
Bank of Canada Cuts To Address Trade Shock, Facilitate Investment
The BoC’s policy move was largely reactionary, rather than guided by pre-emptive signals. Inflation data doesn’t quite support its framing of decelerating price growth—core measures remain above target and are proving sticky. But with exports collapsing and the labour market softening, the Bank sees falling demand feeding into a broader issue: declining business investment.
“Business investment has declined, as firms have become more cautious in the face of weaker demand and ongoing trade uncertainty,” warned the BoC.
Lower rates expand credit availability by reducing borrowing costs and encouraging leverage. The assumption is that households and businesses can pull future income forward—spending and investing it today, at the expense of less income later. Since one person’s spending is another’s paycheque, the result should be a self-reinforcing cycle of economic growth. That’s the textbook theory—but does it hold up historically?
BoC Rate Cuts To Address Trade Shock Haven’t Worked Before
This isn’t the first time the BoC has slashed rates in response to external demand shocks or trade uncertainty. A few relatively recent examples:
- 2015 Oil Shock: Rates were cut to stabilize investment after an abrupt energy price collapse.
- 2008-09 Crisis: The Global Financial Crisis triggered sharp declines in exports and investment.
- 1995 Peso/Trade Contagion: Slowing global demand led to sharp cuts despite fiscal and inflation concerns, shortly after Canada’s last major housing correction in the early ‘90s.
In all three cases, the pattern was the same: exports collapsed, investment fell, hiring slowed, and the BoC responded with easing. Yet in each instance, investment continued to drag—or at best, recovered unevenly.
The 2015 and 2008 shocks saw the cheap credit flow into unproductive allocation—financialized assets like investment property and stocks that rise in price without increasing output. Cheap credit didn’t fuel business investment so much as it provided housing stimulus. This is a structural problem: Canadian tax, regulatory, and housing policies continue to derisk and favour real estate over productive investment. And short of every Canadian getting a visit from the ghost of entrepreneurship past, present, and future, that’s unlikely to change without a major shock.
The mid-‘90s was different. Despite deep rate cuts, credit didn’t flow into housing. Even after Canada’s steepest home price correction on record, affordability remained strained. The housing recovery that followed was gradual, with real prices rising slowly over the next decade.
This Time’s Different… Maybe. Maybe Not
It’s important to note that 2025 is slightly different from past recessions. Trade disruptions today are tariff-led and policy-driven, not commodity or currency-based. Inflation expectations remain anchored, and markets are largely unconvinced that a serious acceleration is coming. The BoC is also making short-term decisions—odd, given its own research shows monetary policy takes 18—24 months to fully work through the economy. That suggests the central bank is reacting without a full picture. Most Canadians won’t notice, but it’s less than ideal for anyone thinking beyond a four-year cycle.
Monetary policy is a blunt tool meant to stimulate aggregate demand—but it can’t be targeted. The BoC is addressing a specific, trade-related shock with the only tool it has. But it’s unclear why it has taken on a problem that’s historically been solved with more precise instruments: targeted supports and trade diplomacy.
This is like trying to get rid of a fly on a locked window while holding a hammer instead of a key. Sure, the hammer might work—but the risk of collateral damage is high. Asking the person with the key to let it out would make a lot more sense.
Though in this case, the person with the key has years of experience swinging the hammer. So to them, the key may just look like the worst hammer ever.