The Bank of Canada's governing council actively debated whether to delay an interest rate cut before ultimately deciding to lower the key overnight rate by 25 basis points to 2.25 percent in October, according to newly released deliberations.
The Decision Drivers
The central bank's decision was primarily driven by three key factors: a softening labour market, tepid growth expectations, and clearer understanding of the economic impact from the trade war initiated by the United States. Council members determined that the rate cut could help support Canada's economy through structural changes prompted by trade upheaval, provided inflation remains under control.
Internal Debate on Timing
Despite consensus on the need for monetary easing, there were significant differences of opinion about the timing of the cut. Some council members advocated for holding rates steady until a future meeting, arguing this would allow more time to assess the extent of labour market weakness, federal fiscal policy developments, and ongoing trade deliberations.
However, with inflation projected to remain close to the bank's two percent target, the arguments for cutting the policy rate in October ultimately proved more compelling. The governing council emphasized that their assessment was contingent on inflation and economic activity evolving broadly in line with their October projections.
Economic Outlook and Risks
The bank's deliberations revealed substantial concerns about Canada's economic trajectory. Trade shock, global uncertainty, and spillover effects from heavily impacted sectors such as steel and automotive were all contributing to economic weakness.
The statement of deliberations noted that even with expected gradual recovery, the economy would remain on a permanently lower path. Gross domestic product is projected to be approximately 1.5 percent lower at the end of 2026 than had been forecast in January 2025.
Council members explicitly stated their willingness to adjust course if new information leads them to conclude the outlook has changed materially. The uncertainty and risks to the economy from volatile trade talks and ongoing tariffs remain significant concerns for policymakers.
The deliberations involved governor Tiff Macklem, senior deputy governor Carolyn Rogers, and deputy governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, Rhys Mendes and Michelle Alexopoulos. They concluded that while monetary policy cannot target specific sectors or open new markets, it can play a crucial role in mitigating spillover effects from hard-hit sectors to the broader economy.
