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The Bank of Canada (BoC) reduced its benchmark interest rate for a second consecutive meeting on Wednesday but also signalled its rate-cutting cycle may be over, calling the current level “about right” to keep inflation in check and help the economy adjust to a slower growth path.

The quarter-point cut brought the policy rate down to 2.25 per cent, its lowest since mid-2022. Analysts view the BoC’s tone as an effort to balance support for a weak economy with its desire to avoid reigniting price pressures.

“If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy through this period of structural adjustment,” the BoC’s release about the decision said.

Markets and economists point to that line as a signal the easing cycle is over, with BMO economist Robert Kavcic writing “that’s likely it, for now.” Government bond yields edged up and the Canadian dollar bounced higher as traders priced out expectations for more rate cuts in the months ahead.

'Structural transition'

The BoC says Wednesday’s cut was driven by “ongoing weakness in the economy and contained inflationary pressures.” But Macklem made clear the decision was less about managing a normal downturn than about adapting to something deeper.

“The weakness we’re seeing in the Canadian economy is more than a cyclical downturn,” he said. “It is also a structural transition.” The BoC’s latest Monetary Policy Report (MPR), which details the central bank’s economic forecasts and was also released on Wednesday, says the U.S. trade conflict is “fundamentally reshaping Canada’s economy.”

Macklem describes the toll of U.S. tariffs as both immediate and lasting.“They’ve destroyed some of the capacity in this country,” he said. Those losses, he says, combined with higher business costs, have limited the power of monetary policy to lift growth without reigniting inflation.

“Monetary policy can help the economy adjust,” he said, “but it cannot restore it to its pre-tariff path.”

The MPR lays out just how far that structural damage extends. The BoC now expects the level of Canadian GDP to be about 1.5 per cent lower by the end of 2026 than forecast back in January, with roughly half of the shortfall coming from reduced potential output and the rest from weaker demand.

Whether it’s Q3 or Q4, small positives or small negatives — they’re not going to feel very good.BoC Governor Tiff Macklem on the economic growth forecast

The hit is concentrated in autos, steel, aluminum and lumber — the sectors Macklem says have been “severely affected” by U.S. tariffs and shifting supply chains. Those losses, he warns, represent a permanent dent in Canada’s productive capacity rather than a typical cyclical slump that policy can offset.

The Bank’s new forecast calls for only a faint pickup in growth after a flat second half of the year. GDP is projected to rise 1.2 per cent in 2025, 1.1 per cent in 2026 and 1.6 per cent in 2027, leaving output well below the path seen before U.S. tariffs hit.

“Whether it’s Q3 or Q4, small positives or small negatives — they’re not going to feel very good,” Macklem said.

Inflation, meanwhile, is expected to hover near the two per cent target, with underlying measures around 2.5 per cent as weaker demand offsets tariff-driven cost pressures.

Labour 'soft,' demand resilient

Macklem says the labour market “remains soft,” with the unemployment rate holding at 7.1 per cent and job losses concentrated in trade-sensitive sectors. Hiring has been weak across the economy, he adds, and slower population growth means fewer new jobs are needed just to keep the employment rate steady.

Household demand, by contrast, has been stronger than expected. Spending and housing activity have helped prop up growth even as exports and business investment sag. Macklem credits recent rate cuts for part of that resilience. “By lowering interest rates, we are providing a bit more support to consumption and housing,” he said.

Still, he cautions that job insecurity and slower income growth are likely to weigh on spending in the months ahead. “When you’re uncertain about your job, you’re much more cautious about your spending,” Macklem noted. The BoC expects consumption to keep growing, but at a more moderate pace than in the first half of 2025.

Many economists also took notice of the pronounced uncertainty still defining economic conditions.

Despite indications that cuts are over, BMO’s Kavcic writes, “ongoing softness in the job market leaves the door open for some further support, and another 25 bp rate cut is still on the table for early-2026.” TD’s Andrew Hencic warns that “the outlook is replete with uncertainty – not least because CUSMA negotiations are set to ramp up next year.”

Macklem took a similar tone at times. He reminded reporters that the Bank had only just returned to publishing a single base-case forecast after months of scenario-based reports meant to cope with extreme uncertainty. “There continues to be considerable uncertainty,” he said. “We need to be humble about our forecasts.”

In September, the BoC cut its overnight rate by 25 basis points, the first reduction since March, noting the weak job market and few signs of inflation accelerating.