Canada’s central bank cut interest rates to support a weakening economy, but admits it may not help. The Bank of Canada (BoC) lowered its overnight rate by 25 basis points to 2.5%, but its own internal meeting notes reveal uncertainty about the decision. In its Summary of Deliberations, the BoC acknowledges it’s downplaying inflation risks to focus on growth—even while admitting monetary policy is the wrong tool for the structural damage underway.
Rate Cut Justified By Weakness, Not Inflation Progress
The BoC cut the overnight rate with the official rationale being economic support, as inflation has eased. They specifically cite Canada’s Q2 GDP contraction, over 100,000 jobs lost in July and August, and easing inflation concerns. The latter point was supported by the view of slowing core inflation measures, and the removal of Canada’s counter-tariffs.
Canadian unemployment has climbed from 6.6% in February to 7.1% in August, with the BoC saying the impact is confined to trade-exposed roles. Recent data shows stronger-than-expected household consumption, but it’s viewed as transitory. That’s a bold call, since rate cuts are meant to boost inflation by borrowing future income to fuel near-term spending.
Bank of Canada Acknowledges Monetary Policy Is The Wrong Tool
The Summary notes reveal the Bank is focused on the short-term, leaning on a tool it admits is poorly suited. The notes explicitly state they’re looking at a “shorter horizon than usual,” as monetary policy changes aren’t fully reflected for up to two years. They further acknowledge that core inflation measures are still “elevated at about 3%,” putting them squarely in the territory of overshooting target inflation. At least the decision supports jobs hit by trade disruptions, right? Not exactly.
The BoC’s meeting notes acknowledge, “Monetary policy is not well suited to structural shocks.” That’s obvious to those in finance due to that whole 2-year timeline issue. It’s also unlikely to resolve the issue of capital flight and weak investment, as short-term lending rates aren’t the right tool to restore investor confidence.
Market Expects BoC To Make Further Cuts—Just Not In October
Those hoping for another round of cuts are likely to be disappointed, but more cuts are still expected. The market currently doesn’t expect any further easing in October, but sees one in January.
“We already knew that the BoC considered holding rates steady, but the arguments were outlined here,” explains Benjamin Reitzes, BMO Managing Director, Canadian Rates & Macro Strategist.
Reitzes notes there is one more job report and CPI data release before the October decision. That can influence the decision, “Nothing here to materially move expectations for the October BoC meeting,” he says.
Despite being the wrong tool, at the time we noted the BoC has a long history of using monetary policy to address this type of shock—failing to produce the desired outcome every time. Well, at least not the outcomes publicly stated.