BOC Trims Rates to 2.25% While Signaling Easing Cycle May Be Over

The Bank of Canada delivered its second consecutive 25 basis point rate cut on Wednesday, bringing the overnight rate to 2.25%, but surprised markets by signaling the easing cycle may be over.

The decision came as policymakers slashed growth forecasts dramatically, citing ongoing trade disruption that has fundamentally reshaped Canada’s economic landscape.

While the rate reduction was widely anticipated, the central bank’s hawkish forward guidance caught some traders off guard, triggering an initial rally in the Loonie before broader market forces reversed the move.

Key Takeaways

• Rate cut as expected: Overnight rate reduced 25bp to 2.25%, lowest since July 2022, with Bank Rate at 2.5% and deposit rate at 2.20%
• Easing cycle likely complete: Statement says current policy rate “about the right level” if economy evolves in line with projections
• Growth forecasts slashed: GDP now expected at 1.2% in 2025 and 1.1% in 2026, down sharply from January’s 1.8% projections for both years
• Structural damage acknowledged: Governor Macklem emphasized trade war has caused permanent capacity losses that monetary policy cannot restore
• Inflation contained: Headline CPI at 2.4% but expected to average 2% over the projection horizon despite underlying measures near 2.5%
• Labor market soft: Unemployment holding at 7.1% with job losses building in trade-sensitive sectors

Link to Bank of Canada Official Statement (October 2025)

In his press conference, Gov. Macklem struck a cautious tone, noting the BOC had returned to single-scenario forecasts and stressing that “there continues to be considerable uncertainty.” He said monetary policy can help the economy adjust but cannot undo the structural damage caused by tariffs, describing the weakness as “a structural transition” rather than a typical downturn.

The Governor explained that further cuts would require “a materially altered economic outlook,” as the opposing effects of tariffs on demand and costs largely balance out. While acknowledging labor market softness and job insecurity, he emphasized that recent rate cuts have supported consumption and housing, adding that the BOC stands ready to respond if conditions worsen.

Link to BOC Press Conference (October 2025)

In its quarterly monetary policy report, BOC showed that growth will stay sluggish, averaging just 1.4% in 2026–2027, with output expected to remain 1.5% below prior projections. It warned that structural shifts from tariffs have permanently reduced capacity and weakened demand, keeping the recovery slow.

The Bank sees headline inflation near 2% as excess supply and a stronger Loonie offset tariff-related costs, though core inflation remains sticky around 3%.

A weak labor market and slower population growth are expected to limit job creation and keep household spending subdued.

Link to BOC Quarterly Monetary Policy Report (October 2025)

Market Reactions

Canadian Dollar vs. Major Currencies: 5-min

The Canadian dollar, which turned lower shortly after the U.S. session opened, jumped after the BOC announcement as traders viewed the statement that rates are “about the right level” as a hawkish signal.

Government bond yields climbed, with the 10-year up 11 basis points to 3.15%, as markets priced out near-term rate cuts. The Loonie extended gains through the morning, supported by both the BOC’s tone and a rebound in oil prices after a larger-than-expected U.S. inventory draw.

By the London close and mid-U.S. trading, focus shifted to the FOMC policy event. The Loonie’s rally quickly faded after the Fed decision, as Powell’s comment that a December rate cut was “not a foregone conclusion” lifted the U.S. dollar and pushed USD/CAD back up to 1.3950.

The move underscored how CAD remains driven by broader dollar trends and risk sentiment despite the BOC’s hawkish tone. Ongoing trade tensions and structural economic challenges kept gains in check, leaving the currency higher against most majors but only slightly firmer against the U.S. dollar by day’s end.