the last cut is the deepest

The Bank of Canada lowered its trend-setting policy rate today to 2.25%, which is the low end of the Bank’s theoretical neutral range. This was the second consecutive cut of 25 basis points, and fourth so far in 2025. The policy rate now sits at its lowest level since June 2022.

Recent data releases on inflation and the labour market in Canada have somewhat muddied the picture for the Bank, but not enough to alter its course in lowering its policy rate. Headline inflation, at 2.4% in September, remains near the Bank’s target, but ticked up from 1.9% in August. Core measures, meanwhile, have proved sticky, sitting just above 3%. The Bank noted in its release that its latest forecast projects inflation to remain near 2%. Hiring also increased in September, with employment rising by 60,000 nationally. In spite of the job gains, the overall labour market remains quite soft, with the unemployment rate at 7.1%.

The Bank’s latest projections expect that Canadian GDP will grow by 1.2% this year, 1.1% in 2026, and 1.6% in 2027, which—if realized—would represent three years of very sluggish growth. The ongoing weakness in the economy and the labour market, which now can be paired with the Bank’s expectations for inflation to remain in check, validates our view that the overnight rate needed to be lower.

The Bank also signalled that this is likely the end of the current interest rate-cutting cycle. In its release, the Bank noted that “if inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment.” 

The Bank’s next announcement is on December 10th. By that time, the Bank will have not only two more readings on inflation and the labour market than it does today, but the new federal budget (out November 4th) to consider, too. The budget will shed light on how much fiscal stimulus will be delivered by the federal government as well as provide an updated immigration policy, both of which could play pivotal roles in monetary policy decisions going forward.