OTTAWA – Last Wednesday, the Bank of Canada (BoC) made a decision that, while expected, holds significant meaning: it cut its key policy interest rate by 25 basis points, bringing it down to 2.25%. This offers a breath of fresh air for many, but the accompanying message is far from optimistic.
In a context where global central banks, from the Fed (the U.S. Federal Reserve) to the ECB (the European Central Bank) in the eurozone, are adjusting their monetary policy, the BoC clearly warned that its own policy cannot, by itself, fix the deep structural damage inflicted on our economy by the trade war with the United States. The impact on interest rates is immediate, but the solution to structural problems is not. The directors of these central banks are walking a tightrope.
A Cut for Breathing Room, But No Miracle Cure
The BoC Governing Council justified this interest rate cut by observing persistent economic weakness nationwide. Indeed, official data shows that inflation, though slightly up, is expected to remain under control, close to the famous 2% target. However, there is a flip side to this coin:
- The Economy Has Suffered: Canada saw its economic growth evaporate, contracting in the second quarter. While we are fortunately far from a technical recession, this economic slowdown is largely attributable to a slump in exports and a freeze in business investment—both held hostage by trade uncertainty.
- The Labor Market Stalls: Furthermore, employment is not in good shape. Notable job losses are observed, especially in sectors dependent on trade, which keeps the unemployment rate at a level that concerns us.
- Rates at the “Right Level”: Consequently, the BoC believes that this new interest rate of 2.25% is “roughly at the right level.” The idea is to keep inflation under control while offering minimal support for the economy to adapt to this new reality.
The Wall of Trade War: When Monetary Policy Admits Powerlessness
The most striking aspect of this announcement is the BoC’s raw honesty. The tone was unusually sober. In fact, Governor Tiff Macklem hammered home that, “Monetary policy cannot undo the damage caused by tariffs.”
This is a hard reality to accept: the tariffs, which stem from tensions with the U.S. economy, have created structural damage. These disruptions have reduced what is known as the productive potential of the Canadian economy. In other words, by raising costs for businesses and forcing a costly reorganization of supply chains, the trade war has reduced our capacity to grow.
Unfortunately, the central bank’s role is therefore limited. It cannot flood the banking system with liquidity or manipulate the money supply as during an acute financial crisis to kickstart everything. Such an injection of liquidity could boost demand (via more loans from commercial banks backed by client deposits), but the BoC cannot risk reigniting inflation, as supply (our capacity to produce) has been damaged.
Pause on Cuts: The Ball is in the Government’s Court
The signal is clear: the BoC does not intend to cut its interest rates further if things remain as expected. A future tightening or interest rate hikes (or even any rate hike at all) seems highly improbable in the short term. Following these adjustments, it is entering “observation mode,” deeming it has done its part for now.
Thus, the BoC is stepping back to assess the effect of its recent actions. This is why some economists are now looking towards the federal government. Perhaps the time has come for fiscal policy to step in, with targeted measures to aid businesses and workers who are bearing the brunt of the trade conflict consequences.
| Economic Indicator | Current Value (October 2025) | Change | Key Impact |
| BoC Policy Rate | 2.25% | $downarrow 0.25$ percentage points | Eases the burden of borrowing (variable mortgages, etc.). |
| Inflation Rate (CPI) | 2.4% (Sept.) | Slight increase | Remains under surveillance, but is not the main concern. |
| GDP Growth (Q2) | -1.6% contraction | Weakness | Highlights the direct impact of trade uncertainty. |
In Brief: A Prudent Adjustment in a Historic Context
The Bank of Canada’s decision is, ultimately, an adjustment maneuver in the face of an unprecedented period of turbulence. The global economy is in a complex phase, as the IMF often points out, and all economic agents must adapt. The BoC seeks to bring some financial calm to Canadians while acknowledging that it cannot perform miracles against geopolitics.
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