Bank of Canada Signals Readiness to Cut Rates as Economy Contracts

The Bank of Canada said it is prepared to lower its policy rate if further economic weakness pushes inflation down while price pressures remain contained. Core inflation is currently running near 2.5 percent, close to the central bank’s 2 percent target. Preliminary data indicate gross domestic product contracted about 1.5 percent in the second quarter, driven by a roughly 25 percent plunge in exports and a 10 percent drop in imports. Final domestic demand grew just above 1 percent, with consumption rising at a similar pace, but the output gap widened to between –1.5 percent and –0.5 percent from –1.0 percent to 0 percent in the previous quarter. The Bank outlined several tariff-related scenarios. Under its base case, GDP is expected to expand around 1 percent in the second half of 2025 before accelerating to 1.8 percent in 2027, while inflation hovers close to 2 percent. A de-escalation of trade frictions would lift growth to roughly 2 percent in late 2025, whereas an escalation would initially damp activity before it rebounds in 2026. Policymakers estimate the neutral interest rate at 2.25 percent to 3.25 percent.