[Text/Feather Fan Guanjin Studio]
On October 29, local time, the Bank of Canada announced that it would lower the benchmark interest rate by 25 basis points to 2.25 percent, in line with general market expectations. This was the second consecutive rate reduction by the Bank of Canada, aimed at addressing the negative effects of the weak economy and trade tensions with the United States.
Recent economic data showed a contraction of Canada’s economy by 1.6 percent in the second quarter, largely reflected by a decline in exports and weak commercial investment. Central Bank Chief Tim McKelem said at a news conference: “The structural damage caused by U.S. tariffs is reducing our production capacity and increasing costs.”
On the inflation front, the Bank of Canada expects inflationary pressures to ease in the coming months and inflation will remain near its 2% target. This expectation provides room for the central bank to cut interest rates. The central bank also cut its inflation forecast for 2025 to 2.0% from 2.3% in January, while its inflation forecast for 2026 and 2027 remained unchanged at 2.1%. Although the annual inflation rate rose from the previous month's 2.4% in September, the core inflation measure remained "moderately stable".
It is worth noting that despite the rate cut, the Canadian dollar has surprisingly strengthened against the US dollar. After the interest rate decision was announced, the USD/CAD exchange rate fell to about 1.3893, the lowest level since Sept. 25. This anomaly stems from the unexpectedly strong forward guidance of the central bank accompanying interest rate cuts. The central bank described the current policy rate as "roughly at a suitable level if inflation and economic activity develop as expected," suggesting this rate cut could mark the end of the easing cycle.
The central bank expects Canada's GDP level to be about 1.5% below the January forecast by the end of 2026. Specifically, GDP is expected to grow by 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027. In particular, the central bank emphasized that trade friction and weak external demand will continue to inhibit Canada's export and manufacturing activities.