On Wednesday, September 17th, at its regular policy meeting, the Bank of Canada (BoC) reduced its target for the overnight rate to 2.5 per cent. This is the first rate drop after three straight pauses in rate policy. With most banks and mortgage lenders, this will mean consumer prime rates will be reduced to 4.70 per cent (4.85 per cent with TD Canada Trust).

Why did the Bank of Canada cut the policy rate?

There are 3 key reasons that prompted the BoC to cut the policy rate now.

First, Canada’s GDP declined by about 1.5 per cent in the second quarter, an expected result of the “tariffs and trade uncertainty weighing heavily on economic activity.” While exports were hit hard, our consumption and housing activity were strong, but those positives are expected to wane as our immigration restrictions reduce population growth and job losses start to impact consumer spending.

Speaking of job losses, the second reason is that our unemployment rate jumped up in August to 7.1%, largely due to job losses in trade-sensitive sectors like steel, automotive, copper and lumber that are being hit by the US tariffs. Wage growth has also continued to ease, as companies are reducing their hiring in anticipation of a weaker business outlook for the next 12 months.

Last but not least, the CPI inflation report came out yesterday and reported 1.9 per cent for August, and other inflation measures watched by the BoC are also showing that inflation pressures are easing and are no longer a substantial concern. Combined with the decision of the Federal Government to remove most of the retaliatory tariffs Canada put on imports from the US, and the weakening job market, the BoC is no longer worried about inflation being a problem in the short term.

Putting all of those factors together, the BoC has decided that its priority can now shift from fighting inflation to stimulating the economy.

What’s next for the policy rate?

With inflation looking relatively under control and our economy showing signs of distress, it’s likely that we’ll see at least 1 more rate drop this fall (probably another 0.25 per cent decrease) and then some more pausing into the start of 2026 as the BoC waits to see the data come in for how much impact the rate drops have, and also assess the continued damage that US tariffs have on our export industries.

The next scheduled BoC rate announcement is October 29th, 2025.

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