The Bank of Canada announced on Wednesday (Sept. 17) it is dropping its overnight rate a quarter of a per cent to 2.5 per cent.
The move to boost the economy comes as growth lags, but inflation remains muted — despite the imposition of tariffs on some Canadian goods by the United States.
Tiff Macklem, the governor of the Bank of Canada, gave three main reasons for the change in direction from July, when the bank decided to keep rates steady.
Canada's labour market has softened, upward pressures on underlying inflation have diminished, and the removal of retaliatory tariffs against the U.S. by the Canadian government means there is less "upside risk" to future inflation.
"There was a clear consensus to lower our policy rate for the first time since March," Macklem said in a press conference announcing the move. "We will continue to assess the impacts of tariffs and uncertainty on economic activity and inflation."
He also said that global growth is now showing signs of slowing. U.S. consumers are cautious amid tariff-induced inflation, and in China, GDP growth is slowing as investment softens.
"Considerable uncertainty remains," Macklem said. "But with a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks going forward."
The Canadian economy is also being impacted, and domestic GDP declined 1.6 per cent in the second quarter "largely as expected."
Business confidence is also taking a hit, with businesses telling the bank they have paused investment plans due to uncertainty about U.S. trade policy.
The bank also found some signs of resilience, with consumption stronger than expected and housing activity increasing in the second quarter. Inflation for August was 1.9 per cent, which Macklem credited to the removal of the consumer carbon tax.
