"Bottoming out" interest rate cut completed? The Bank of Canada says the interest rate is now roughly appropriate and may remain unchanged in the future.

On Wednesday, the Bank of Canada cut interest rates by 25 basis points for the second time in a row, bringing the benchmark overnight rate down to 2.25%, the lowest level since July 2022. Governor Macklem stated that the impact of the U.S. tariffs has led to a "structural shift" which has weakened Canada's economic outlook. However, with the current growth trajectory generally in line with expectations, interest rates are considered to be at an appropriate level and no further easing is deemed necessary. The Bank also significantly lowered its growth expectations, providing a pessimistic assessment of the economic outlook. Macklem said that the U.S.-Canada trade conflict is expected to persist long-term, causing structural damage that suppresses economic potential and raises costs. Monetary policy needs to stimulate demand while maintaining low inflation, but space is limited. "If the outlook changes, we are prepared to act." Following the announcement, the Canadian dollar extended its gains to 1.3915 against the U.S. dollar, the strongest since October 1, with a third consecutive day of increase and Canadian bond yields rising across the board. Expectations for a rate cut in December in the swap market decreased from over 30% to about 20%. The Bank stated that the supply-side shock from the tariffs weakens the Bank's ability to support the economy. "The structural damage caused by the trade conflict reduces economic capacity and increases costs, limiting the space for monetary policy to stimulate demand." The policy release coincides with the upcoming release of Canada's first budget by Prime Minister Carney's cabinet, expected to invest heavily in infrastructure and major projects to support growth. Macklem emphasized at a press conference that the Bank's work is never complete and uncertainty remains high. When asked what would constitute a "significant change" that would trigger further action, he said evidence beyond just monthly data accumulation and a clear deviation from the latest forecasts would be necessary. While core inflation remains around 3%, the upward momentum has dissipated, with a series of indicators showing underlying inflation pressures have eased to around 2.5%. The Bank expects the Canadian economy to be in a state of oversupply for the foreseeable future, lowering growth expectations for the second half of 2025 to 0.75%. Compared to January predictions, the economy is projected to be 1.5% smaller by the end of 2026. This communication indicates that decision-makers are still resisting further stimulus to avoid reigniting inflation amid global price and supply chain disruptions. Due to the uncertain prospects of U.S. tariffs, the Bank of Canada is no longer using scenario analysis to address uncertainty. Macklem said, "With tariffs in place and U.S. protectionism crystallized, the impact is clearer, though the future scope of tariffs remains uncertain." He also emphasized that the forecast range is "wider than usual," requiring a "humble" approach to the outlook. Compared to January, the Bank of Canada has lowered growth expectations for 2025 from 1.8% to 1.2%, for 2026 from 1.8% to 1.1%, and expects a slight increase to 1.6% in 2027. The Bank stated that tariffs raise business costs and exacerbate uncertainty, with business investment expected to remain weak due to declining U.S. demand and consumption growth slowing due to population growth and soft employment, with per capita consumption averaging only about 1% by 2026-2027. "There's nothing to be happy about, we're cutting interest rates because the economy is under huge pressure," said Warren Lovely, Managing Director of National Bank Financial, in a TV interview. Geopolitical risks are swirling and "it's necessary to buy a bit of rate insurance." He added, "The industrial sector is facing a 'death by a thousand cuts' from tariffs, this economy needs support," and "the central bank may not be done yet." The current overnight rate of 2.25% is at the bottom of the Bank's assessment of the neutral rate range, neither stimulating nor suppressing the economy. Andrew Hencic, Senior Economist at TD Bank, said that a "pause is reasonable" in the current environment, but the federal budget may pose upside risks, and strong fiscal support for structural transformation could change the medium-term path and the Bank's assessment. St-Arnaud, Chief Economist at Central Alberta, believes that the neutral rate may be lower than the Bank's estimate, and further rate cuts "may still be necessary." While a rate cut in December is still possible, "today's statement suggests a delay until early 2026." The Bank acknowledges that trade tensions are raising costs, but with Canada canceling most of its retaliatory tariffs, the inflationary impact is weaker than previously estimated, with inflation expected to remain around 2% until 2027.