Bank of Canada Moves to Support Economy
The Bank of Canada lowered its key lending rate to 2.5% on Wednesday, down from 2.75%, in a move aimed at easing pressure on borrowers. The decision follows months of tariff uncertainty as U.S. President Donald Trump’s trade policies weigh heavily on Canadian industries.
By cutting rates, policymakers hope to give households and businesses some breathing room as economic conditions worsen. Analysts say this shift signals a broader strategy to stabilize Canada’s economy against external shocks.
Tariffs Create Sectoral Strain
Governor Tiff Macklem said the decision reflected clear evidence that tariffs are hurting key sectors, including autos, steel, and aluminum. These industries have faced job losses and weakened demand since the U.S. administration escalated its trade measures. Manufacturing hubs in Ontario and Quebec have been among the hardest hit, raising concerns over long-term competitiveness. Economists warn that without relief, layoffs could spread across supply chains, further weakening growth.
GDP Contracts in Second Quarter
According to the central bank, Canada’s GDP fell 1.5% in Q2 2025, reversing modest growth earlier in the year. While exporters initially benefited from a rush of U.S. orders in Q1, shipments fell 27% in Q2 as American demand dropped once tariffs took full effect. This contraction highlights how quickly trade shocks can ripple through Canada’s economy. Macklem acknowledged that while the overall outlook remains uncertain, the immediate impact is already severe.
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Impact on Canadian Exports
“Tariffs are weakening the Canadian economy. You can see that very clearly in the directly affected sectors,” Macklem told reporters. The decline underscores the challenges of maintaining trade momentum with the U.S., Canada’s largest trading partner.
Exporters are now scrambling to diversify markets, looking to Europe and Asia for new buyers. Still, experts caution that replacing lost U.S. demand will be difficult given the deep economic integration between the two countries.
USMCA Review Looms Large
Although many Canadian exports remain exempt under the United States-Mexico-Canada Agreement (USMCA), the trade pact is set for review in 2026. Macklem warned that Trump may seek major revisions, raising further uncertainty for Canada’s export-driven economy. Businesses fear that stricter rules could undermine investments already committed under the current deal. Trade lawyers suggest Canada may need to prepare for tough negotiations to defend its core industries.
Inflation and Policy Caution
The bank emphasized it will proceed cautiously with future rate decisions, balancing risks of weaker growth with potential inflationary pressures from protectionist trade policies. Macklem noted businesses are facing higher costs as they adjust supply chains, making inflation trends harder to predict. Rising import costs could feed into consumer prices, putting additional pressure on households. The central bank stressed it would closely monitor both inflation and employment data before making further moves.
Analysts Expect More Cuts Ahead
Economists said the move was widely anticipated. Royce Mendes of Desjardins predicted another rate cut in October, though he cautioned that the central bank remains highly concerned about future tariff damage. Market watchers agree that Canada’s monetary policy path will largely depend on U.S. trade actions. Some believe further stimulus may be required to prevent a deeper slowdown, especially if tariffs expand into new sectors.
