By Erik Hertzberg
(Bloomberg) — The Bank of Canada considered holding interest rates steady in September amid trade uncertainty and stronger consumption, but opted to cut given signs of a weakening economy and tamer core inflation.
Policymakers led by Governor Tiff Macklem trimmed the policy rate to 2.5% last month because Canada’s economy and jobs market had been damaged by the trade dispute with the U.S. But while exports and business investment contracted in the second quarter, “stronger than expected” momentum in household consumption was cited as a reason to hold borrowing costs steady.
“Consumption growth, both in aggregate and per person, was robust and broad-based,” the bank said in a summary of deliberations released Wednesday, adding that past interest rate cuts may be contributing to the strength. Officials said consumer resilience would “continue to support growth going forward.”
Still, policymakers agreed the hit to the economy and “more contained” inflation readings justified a quarter percentage-point cut. Prime Minister Mark Carney dropped retaliatory levies on imports of some US goods, removing a “significant risk” that tariff costs would hit Canadian consumers. Core inflation readings, while above the bank’s 2% target, aren’t worsening, officials said.
“There was more evidence from recent monthly inflation readings that the upward pressures on core inflation may be easing,” the bank said. At the same time, policymakers acknowledged that while “upside risks had diminished, they had not gone away.”
Officials said trade disruptions mean the economy is working less efficiently, adding costs, and how and when U.S. tariffs on global goods are passed through to the Canadian consumer remains a major question mark.
Combined, the communications suggest that while the central bank has restarted monetary easing, they plan to proceed cautiously — seeing risks to inflation on “both sides.”
The bank’s governing council also acknowledged it was “particularly difficult to assess the amount of slack in the economy,” and said the structural shock posed by U.S. President Donald Trump’s tariffs adds to uncertainty in terms of supply and demand impacts.
“Monetary policy is not well suited to structural shocks,” they said. Policymakers added that while there was more stability about the outlook for U.S. tariffs, the upcoming review of a trade agreement between Canada, the U.S. and Mexico would keep uncertainty elevated and restrict business investment.
Officials said the “relative stability” means they expect to offer a “baseline projection for growth and inflation” in their October monetary policy report. The central bank has not provided a conventional set of point forecasts since January, instead opting to lay out multiple scenarios due to the chaotic trade policy environment.
The bank also noted federal and provincial government spending on infrastructure and support for sectors and workers affected by tariffs is likely to be higher than it anticipated in its last monetary policy report in July. Carney’s government is due to release its budget Nov. 4.
–With assistance from Mario Baker Ramirez.
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Last modified: October 1, 2025
