On Wednesday, October 29th, at its regular policy meeting, the Bank of Canada (BoC) reduced its target for the overnight rate to 2.25 per cent. This is the second rate drop in a row after three straight pauses in rate policy over the spring/summer. With most banks and mortgage lenders, this will mean consumer prime rates will be reduced to 4.45 per cent (4.6 per cent with TD Canada Trust).

Why did the Bank of Canada cut the policy rate?

In it’s announcement, the BoC highlighted 4 points as reasons for the rate drop.

Starting with international factors, the global economy is generally weakening as a result of the tariffs being imposed by the U.S. on many trade partners. This is reducing business investment in many economies, which is generally deflationary.

As far as our national economy is concerned, Canada’s GDP declined by 1.6 per cent in the second quarter, and while household spending has remained resilient so far, the substantial job losses in tariff-impacted sectors like autos, steel, aluminum and lumber are expected to dampen the economy further moving forward.

For our labour market more broadly, the unemployment rate in September remained at 7.1 per cent (stable from August, but that follows 2 previous months of increasing unemployment). Unemployment at 7 per cent or above has historically meant a weak job market and likely means that wage growth will be meager for the foreseeable future.

Finally, the most recent CPI report showed inflation jumped to 2.4 per cent in September from 1.9 per cent in August. This was a higher jump than expected, but not so much that the BoC is worried about inflation in a general sense. The weakness in both our economy and the labour market, as well as the removal of the retaliatory tariffs on U.S. imports, should be more than enough to keep inflation from building any substantial pressure at this time.

So, with inflation felt to be under control, the BoC is offering a small amount of economic stimulus to help prevent an official recession.

What’s next for the policy rate?

The BoC will likely pause now as they wait to see how aggressive the federal goverment will be in it’s upcoming budget with stimulus programs to juice the economy. If the feds annouce vast programs that will pump money into the economy quickly, .the BoC will be wary of inflation and reluctant to cut any further until such programs roll out and their impact can be measured.

In other words, we expect that the BoC will pause for the next few meetings.

The next scheduled BoC rate announcement is December 10th, 2025.

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