We’re here to help: The Bank of Canada pivots to supporting economic growth, following second quarter contraction.

“The Bank’s 25-basis-point cut this morning was no surprise—the weaker economic data from the previous release left little choice. The Governing Council’s callout to support economic growth is an intentional pivot, recognizing that conditions warrant more action. The Bank also acknowledged what we’ve been seeing: household spending isn’t holding up the way it used to. As we expected, inflation is indeed well-contained, with most measures just above the 2% target. This is a welcome pivot that sets the stage for further action in the coming meetings.”

Today the Bank of Canada lowered its policy rate by 25 basis points (bps) to 2.5% after three meetings on hold. As expected, markets had the move nearly fully priced following yesterday’s inflation report, whose details were more muted even as the headline rose to 1.9%.

Governing Council’s messaging shifted focus to support the economy, despite a cautious tone. All members agreed to the quarter-point cut. This is a notable refocus on supporting an economy that contracted 1.6% in the second quarter and saw two months of job losses over the summer. It’s unclear how fiscal policy factored into today’s decision, but with inflation under control, risk-mitigation likely played a role.

Canada’s economy is roughly in line with the Bank’s July MPR scenario. Real GDP fell 1.6% in Q2, just below the Bank’s -1.5% forecast. The Bank’s 1% growth expectation for Q3 is currently above our tracking. In today’s press conference, Governor Macklem noted that the trade war is placing significant strain on the economy. The recent rise in unemployment, alongside two consecutive months of job losses, also weighed on the decision to cut.

The “balance of risks has shifted.” Inflation risks are lower than at the July decision. The removal of Canadian counter-tariffs gave Governing Council confidence that potential knock-on effects on inflation have eased. The Governor noted that core measures (excluding energy and indirect taxes) remain modestly above the 2% target, but recent monthly momentum points to cooling.

All told, Governing Council remains “cautious” even as it delivers a cut, given the incoming data. Their data dependence will be tested with the federal budget on November 4, just a week after the October 29 decision. We expect another rate cut this fall, though it’s unlikely they’ll have the confidence to move again at the October meeting.