We’re in a tricky economic moment, one of those “not quite here, not quite there” phases where central banks are walking a tightrope. Inflation remains sticky. Growth is weak. Jobs are showing cracks. The Bank of Canada just made a move that reflects exactly how challenging the balancing act is.
On September 17, 2025, the Bank of Canada lowered its policy (overnight) interest rate to 2.50%, the first cut since March.
Why the cut now? Here’s what the Bank of Canada emphasized:
- Labour market softening: Employment has declined in recent months, particularly in sectors tied to trade. The unemployment rate touched around 7.1% in August.
- Cooling inflation pressures: While core inflation has hovered near 3%, monthly momentum has lessened, and a broader set of indicators suggests underlying inflation is around 2½%.
- Trade tensions easing (somewhat): Canada removed most retaliatory tariffs on U.S. goods, reducing upside risk to future price pressures.
- Weak export performance and global risk: Trade uncertainty, slowing global growth, and supply chain reconfigurations are dragging on Canada’s GDP and business investment.
Heard of stagflation? It’s the economic triple threat: rising prices (inflation), slowing growth, and climbing unemployment. We’re not in full stagflation yet, but central banks are caught in a bind. Raise rates, and they risk choking growth. Cut them, and inflation gets room to run.
Why Interest Rates Matter to You:
- Borrowing & mortgages: Lower rates make debt more affordable, which is beneficial for homebuyers, businesses, or anyone with variable-rate loans. But a sudden shift upward could sting.
- Investments: Bond yields, stock valuations, and currency markets all react to interest rate expectations.
- Cost of living & wages: Inflation erodes purchasing power. If wages don’t keep up, households feel squeezed.
- Business decisions: Companies often delay or cut investments when interest rates are uncertain, which can exacerbate the slowdown.
What You Can Do to Protect Yourself:
- Be flexible: Avoid overcommitting to risky debt if your income or cash flow is vulnerable.
- Lock in if it makes sense: If you want certainty, fixed-rate loans or mortgages can provide protection.
- Stress-test your finances: Imagine your payments increasing or your income dropping.
- Stay informed: The more you understand what’s driving rate decisions, the better you can hedge your decisions.
For individuals, homeowners, and investors, the key is to prepare for uncertainty, avoid extremes, and stay tuned to economic data. This might last longer than we’d like, but awareness is your best tool for navigating it.
The next Bank of Canada rate announcement is scheduled for October 29, 2025.
