Table of Contents
What happened & what sources say
The BoC cut its key policy rate by 25 basis points to 2.50%. It’s the lowest in about three years.
The trigger: trade shock, weaker exports, retreating investment, a softening labour market. Demand is under pressure.
Inflation is easing somewhat, but “core” inflation measures remain above the Bank’s preferred target or tolerance. That’s one reason many analysts see the move as cautious — the BoC wants to balance stimulus with the risk of inflation getting out of hand.
How the Bank of Canada has used rate cuts in the past
This isn’t the first time the Bank of Canada has reached for the rate-cut lever. Looking back helps put today’s move in context.
2008–2009 (Financial Crisis)
When the global economy nearly collapsed, the Bank slashed rates to keep credit flowing. The goal was simple: prevent banks from freezing up and encourage people and businesses to keep borrowing and spending.
It worked in the short term—Canada’s banks stayed stable, and the economy avoided the worst of the global crash. But the side effect was that households took on more debt, which became a long-term challenge.
Mid-1990s (Trade and commodity shocks)
External shocks, such as weaker demand for Canadian exports and falling commodity prices, prompted the Bank to lower rates. The idea was to give businesses and consumers a break while exports struggled.
Growth did return, but not always strongly. In some cases, low rates encouraged riskier borrowing rather than real economic investment.
Recent trade tensions (2024–2025)
With U.S. tariffs rising and global trade under pressure, the Bank again leaned on rate cuts. The intention was to mitigate the impact on exports and maintain the domestic economy's momentum.
The results were mixed. Borrowing costs fell, but businesses stayed cautious because the bigger problem—trade uncertainty—wasn’t solved by cheaper money.
Here are likely upsides and downsides
Pros
Boost demand. Lower borrowing costs make it cheaper for firms to invest, for consumers to spend (on homes, durable goods). Helps when exports are weak.
Signal effect. Rate cuts can help expectations. If people believe economic conditions will improve (or that the central Bank is supportive), that can feed into hiring, investment, and spending.
Mitigates downside risk from trade shock. Since exports are falling, easing gives some buffer.
Acts as insurance. Given the softening labour market, growing economic uncertainty, and inflation easing somewhat, acting now may help avoid worse outcomes later.
Cons / Risks
Inflation may re-accelerate. Core inflation remains above target. Cutting too early or too aggressively could lead to renewed inflationary pressures, especially with shelter costs and services continuing to rise.
Limited effectiveness if structural issues or non-monetary constraints are dominant. If firms are reluctant to invest due to trade policy uncertainty, regulatory burdens, or supply-chain problems, interest rate cuts are ineffective.
Risk of reducing room for future cuts. If this move doesn’t reverse the slowdown, or worse, if inflation picks up, the BoC may need to rise again, which could hurt its credibility.
Side effects: financial risk (asset bubbles, high household debt). Low rates tend to push people into riskier borrowing, with housing markets and affordability already under strain. Cheap credit tends to flow into unproductive assets (stocks and housing) that do not increase economic output.
Will it help? And what to watch
The consensus is that this rate cut is warranted, given the signs of weakening in exports, investment, and labour markets. But it’s modest. It helps somewhat, but won’t alone restore strong growth unless the root problems are addressed.
What to watch next:
How core inflation (especially shelter, services) evolves. If it stays high, BoC may need to roll back or slow down cuts.
Business investment: Are firms increasing capex? Or are they staying on the sidelines because of uncertainty?
Exchange rate movements. A weakening dollar helps exports but increases import costs/inflation.
Government policy (trade, regulation, taxation) signals that risk/uncertainty is being resolved.
The BoC’s rate cut is a reasonable move given the current threats from trade damage, weak external demand, and softening growth. Historically, BoC has used cuts under similar conditions with mixed success: it helps, but only when other pieces (trade policy, structural reforms, fiscal policy) are aligned.
Monetary easing is a tool, not a silver bullet. To really reverse the negative trends, Canada will need clearer trade policies, better investment climates, and the tackling of supply-side constraints. Only then will cheaper credit translate into durable growth.
How we can help
With cash and cash equivalents earning less interest, and borrowing rates coming down, we can help you weigh the benefits of holding excess cash versus investing or reducing debt. We recommend you review your portfolio at least annually to ensure you're on track to meet your goals.