Bank of Canada Lowers Policy Rate to 2.25%
Bank of Canada Lowers Policy Rate Amid Structural Economic Adjustment
Ottawa, Ontario—October 29, 2025
The Bank of Canada (BoC) announced a reduction in its key policy rate today, lowering the target for the overnight rate by 25 basis points to 2.25%. This decision, made on October 29, 2025, sets the Bank Rate at 2.5% and the deposit rate at 2.20%. The announcement was released alongside the Monetary Policy Report (MPR).
Rationale for the Rate Cut
The Governing Council decided to cut the policy rate due to ongoing weakness in the economy and the expectation that inflation will remain close to the 2% target. The Bank believes that if inflation and economic activity evolve broadly in line with its October projection, the current policy rate level is appropriate to maintain inflation near 2% while assisting the economy through a period of structural adjustment. The BoC stressed that it is prepared to respond if the economic outlook changes and will carefully assess incoming data.
Canadian Economic Challenges
The Canadian economy is undergoing a difficult transition, adjusting to tariffs and a sharp drop in demand for exports. The structural damage caused by the trade conflict reduces the economy’s overall capacity and introduces higher costs. This environment limits the role monetary policy can play in boosting demand while maintaining low inflation.
Key economic indicators show persistent weakness:
GDP and Trade: The economy contracted by 1.6% in the second quarter, largely reflecting a drop in exports and weak business investment due to heightened uncertainty. US trade actions are having severe effects on specific trade-sensitive sectors, including autos, steel, aluminum, and lumber.
Growth Projections: GDP growth is expected to be weak in the second half of 2025. The Bank projects GDP will grow by 1.2% in 2025, 1.1% in 2026, and 1.6% in 2027. Excess capacity in the economy is expected to persist and be gradually absorbed.
Labour Market: Canada’s labour market remains soft. September saw employment gains following two months of sizeable losses, but job losses are building in trade-sensitive sectors and hiring is weak across the economy. The unemployment rate was 7.1% in September, and wage growth has slowed.
Inflation Outlook
While total inflation has been around 2%, underlying inflation remains about 2½%. CPI inflation reached 2.4% in September. The Bank’s preferred measures of core inflation have been “sticky” around 3%. However, the Bank expects inflationary pressures to ease and CPI inflation to remain near 2% over the projection horizon.
Global Context
Global economic conditions were a factor in the decision, with the BoC noting that global trade relationships are being reconfigured, and ongoing trade tensions are dampening investment internationally.
Global Growth: The Bank projects global economic growth to slow from about 3¼% in 2025 to roughly 3% in both 2026 and 2027.
United States: Economic activity remains strong, supported by the boom in AI investment, though tariffs have begun to push up consumer prices.
Currency: The Canadian dollar has slightly depreciated against the US dollar.
The Bank noted that since US trade policy remains unpredictable, the economic projection in the Monetary Policy Report is subject to a wider-than-usual range of risks.
Bank of Canada Mandate and Future Dates
As a central bank, the Bank of Canada promotes Canada’s economic stability and its citizens’ financial well-being. Its core functions include monetary policy, maintaining the financial system, currency issuance, funds management, and retail payments supervision.
The BoC will release its next scheduled overnight rate target announcement on December 10, 2025. The Bank’s next Monetary Policy Report is scheduled for release on January 28, 2026.