Bank of Canada drops overnight lending rate to 2.5% as economy shows signs of slowing

Trade tensions with the United States weigh on economic growth, prompting rate cut.

Yesterday, the Bank of Canada lowered its overnight lending rate by 25 basis points to 2.5%, the first rate cut since March.

With the labour market showing signs of weakness and ongoing trade tensions with the U.S. weighing on growth, the Governing Council moved to ease borrowing costs.

“At this decision, there was clear consensus to reduce our policy rate,”

said Governor Tiff Macklem at a press conference following the announcement.

“We will continue to monitor the impact of tariffs and uncertainty on economic activity and inflation. Our focus remains on exports and their effects on business investment, employment, and household spending, as well as how supply chain disruptions influence consumer prices and inflation expectations.”

Canada’s Consumer Price Index (CPI) rose 1.9% year over year in August, up from 1.7% in July, largely driven by higher gasoline prices.

“We remain committed to ensuring Canadians have confidence in price stability through this period of global disruption,” added Macklem. “Our goal is to support growth while keeping inflation well anchored.”

Rate cut may fuel stronger fall housing activity

Following a slow spring, housing activity picked up modestly over the summer. With borrowing costs now lower, the fall—traditionally one of the busiest seasons for real estate—could see stronger demand.

According to the latest Royal LePage® Home Price Update and Market Forecast, the aggregate price of a home in Canada rose slightly in Q2 2025, up 0.3% year over year to $826,400. On a quarterly basis, however, the national aggregate price dipped 0.4%.

“In a shift from its holding pattern, the Bank of Canada has resumed rate cuts,” said Phil Soper, president and CEO of Royal LePage. “While inflation remains on target, labour market softness tipped the balance in favour of additional relief.”

Soper noted that the effects of Canada’s tariff dispute with the U.S. became more visible over the summer, with August layoffs concentrated in trade-dependent industries like warehousing and manufacturing. “Though inflation remains stable, this latest cut highlights the Bank’s efforts to protect broader economic stability,” he said. “For housing, lower borrowing costs could provide fresh momentum this fall. In higher-priced regions such as Ontario and British Columbia, the move may encourage more buyers back into the market.”

The Bank of Canada’s next interest rate decision is scheduled for Wednesday, October 29th.