Interest rates lowered: 1) Bank of Canada lowers key interest rate but signals cuts may be done; 2)How do lower interest rates impact your life?

1) Bank of Canada lowers key interest rate but signals cuts may be done

Courtesy Barrie360.com and Canadian Press

By Craig Lord, October 29, 2025

The Bank of Canada is signalling it might be done cutting interest rates in the short term but that doesn’t mean economic growth is going to pick up quickly after a “structural” hit from U.S. tariffs.

The central bank lowered its benchmark interest rate to 2.25 per cent with a second consecutive cut on Wednesday.

Bank of Canada governor Tiff Macklem told reporters after the announcement that monetary policy-makers feel the key rate is at “about the right level” to keep inflation close to the bank’s two per cent target while supporting the economy through tariff disruptions — provided the economy evolves in line with its forecasts.

Economists widely expected Wednesday’s cut as Canada’s economy shows cracks from U.S. tariffs but inflation appears largely under control.

Macklem said the central bank is expecting the pressures pushing inflation higher — costs related to tariffs, for example — will be largely offset by a weaker economy going forward.

He also said there isn’t much more the Bank of Canada can do at this point to help the country through the turmoil tied to tariffs — something he considers a structural shock to the economy, not a cyclical or temporary one.

“Monetary policy can’t target specific sectors … it can’t help companies find new markets, it can’t help companies reconfigure their supply chains,” he said.

“What it can do is it can try to mitigate the spillovers from the hard-hit sectors to the rest of the economy.”

The Bank of Canada returned to publishing a central forecast for the economy and inflation Wednesday, a practice it had foregone since January as tariffs clouded its outlook.

After the economy contracted in response to a sharp drop in exports in the second quarter, the bank now sees modest annualized GDP growth of 0.5 per cent this quarter and one per cent in the fourth quarter.

The forecasts show growth will likely be restrained in the next two years, averaging 1.4 per cent, as population growth slows and Canadian exporters attempt to diversify beyond the U.S. market.

The central bank expects trade disruptions will structurally reduce the size of Canada’s economy and forecasts GDP will be 1.5 per cent lower by the end of 2026 than its projections before U.S. tariffs were imposed earlier this year.

Macklem warned that Canada must work to boost its productivity in the face of this weaker growth or face harsh economic consequences.

“Unless we change some other things, our standard of living as a country, Canadians, is going to be lower than it otherwise would have been,” he said.

Tony Stillo, director of Canada economics at Oxford Economics, said in an interview that the central bank’s updated forecasts are largely in line with his own.

Though Canada’s economy will be growing on the whole, communities relying on tariffed sectors like steel, aluminum and lumber will have it worse, Stillo warned.

“You’ll hear people talking about tough times,” he said.

Compared to the central bank’s forecasts, Stillo sees growth rebounding faster by 2027 after Ottawa hopefully lands a deal to end most U.S. duties. The Bank of Canada’s forecasts use today’s tariff levels as its baseline.

The monetary policy report estimated the average U.S. tariff rate across all Canadian goods sits just shy of six per cent today; Canada’s counter-tariffs on the United States meanwhile average out to roughly one per cent, according to the central bank.

U.S. tariff policy remains “unpredictable,” Macklem noted. He made a brief reference to U.S. President Donald Trump’s decision over the past week to abruptly halt trade talks with Canada over an Ontario ad campaign and threats to impose an extra 10 per cent tariff on Canadian goods.

This environment means the Bank of Canada can’t put as much stake in its forecasts as usual.

“The range of possible outcomes is wider than usual — we need to be humble about our forecast. If the outlook changes, we are prepared to respond,” Macklem said.

What constitutes a material change to the bank is not one month of readings or a single data point, Macklem said, but an “accumulation of evidence” that the economy is shifting according to the central bank’s baseline.

The Bank of Canada will get another significant input for its modelling next week when the federal government tables its long-awaited fall budget.

Macklem has long said that while monetary policy is limited in how much it can support the economy through the trade disruption, fiscal policy-makers can provide targeted supports to respond to tariffs.

The governor was typically tight-lipped when asked how Ottawa should respond to current economic challenges in next week’s budget — the Bank of Canada operates independently from the federal government — but said the central bank would weigh the spending plan based on how it added to both supply and demand forces in the economy.

Stillo said stimulative federal spending will likely hold the Bank of Canada back from steeper cuts in this cycle.

“The heavy lifting is going to come from the fiscal side. And that’s what we’re expecting to see in the federal budget next week,” he said.

Stillo expects the bank will hold its benchmark rate steady through to 2027, at which point a return to growth might warrant higher rates.

But he also doesn’t rule out additional cuts of a quarter to a half percentage point if the bank sees the economy deteriorate sharply.

“That would be a much more dire outcome for the economy than we have in our baseline,” he said.

Stephen Brown, deputy chief North America economist with Capital Economics, said in a note to clients Wednesday that he expects the bank will continue to reduce its policy rate to as low as 1.75 per cent in 2026.

He said he is expecting GDP will come in a touch lower than the Bank of Canada is now projecting in the years ahead, pushing inflation even lower and warranting more rate-cut relief for the economy.

BMO senior economist Robert Kavcic said he also believes additional cuts are not off the table.

“We believe that ongoing softness in the job market leaves the door open for some further support, and another (quarter-point cut) is still on the table for early 2026,” he said in a note.

Lenders including CIBC, RBC, TD, BMO and National Bank all announced they would match the size of the Bank of Canada’s rate reduction by lowering their prime lending rate to 4.45 per cent from 4.7 per cent, effective Thursday.

The Bank of Canada’s final interest rate decision of the year is set for Dec. 10.

2How do lower interest rates impact your life?

Courtesy Jenna Benchetrit · CBC News, Oct 29, 2025

While most borrowers see immediate benefits, they’re less welcomed by savers

When the Bank of Canada changes its benchmark interest rate, it can affect you in many ways. (CBC)

The Bank of Canada lowered its key interest rates to 2.25 per cent on Wednesday, continuing a rate-cutting cycle that began in June 2024.

Ahead of this latest change, CBC News spoke with economists, mortgage experts and financial planners who explained how interest rates work and what they watch for with every Bank of Canada announcement.

Here’s what lower interest rates mean for you, small businesses and the Canadian economy.

What are interest rates, anyway?

Interest is what consumers or institutions pay to borrow money. It’s also what a bank might pay a client for leaving money in their account.

When you take out a loan, “you’ll be given the cash and you will need to repay a little bit of that loan over time,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce in Ottawa.

“Some of what that repayment includes is interest.”

Commercial banks like RBC, Scotiabank, TD Bank, CIBC and BMO use “prime rates,” which are their starting rates to charge consumers who borrow money. That rate is usually combined with a percentage that is calculated based on a person’s creditworthiness.

Commercial banks generally set their ‘prime rate’ near the Bank of Canada’s benchmark rate. (The Canadian Press)

Those prime rates are guided by the Bank of Canada’s overnight interest rate — a tool that central banks use to keep inflation in check.

When inflation is running too high, the Bank of Canada might raise that benchmark rate to discourage people from borrowing (and spending) money.

DiCapua said this could, for example, encourage someone shopping for a new car to “get a smaller car or a cheaper car” — or delay buying a car altogether.

But when rates come down, that makes borrowing money cheaper. And that often encourages people to spend more, which can lead to economic growth.

Lower interest rates can mean different things for different parts of the economy. Because of that, the central bank balances potential growth against the risk of inflation when setting its benchmark rate.

How interest rates impact the housing market

When mortgage rates go down, it can encourage buyers to jump into the housing market. (Showwei Chu/CBC)

Homeowners — specifically those with a variable rate mortgage — are among those who feel immediate relief when the Bank of Canada lowers its interest rate.

Their monthly mortgage payments will fluctuate as rates do.

Prospective homeowners might also be incentivized to jump into the market when lenders offer a lower variable rate, said DiCapua.

The lower benchmark rate could also help those potential buyers lock in a lower “fixed” mortgage rate, which won’t fluctuate with future interest rate changes.

How will Bank of Canada’s rate cut have an impact on home mortgages?

September and October are usually the weaker months for the markets, but this year’s rally keeps surprising. Not so surprising is Canada’s central bank decision last week to lower its key interest rate by 25 basis points. Mark Ting from Foundation Wealth joins CBC’s Dan Burritt to break down what it means for those shopping around for a mortgage.

That’s why a lower interest rate can lead to more home sales, which can in turn impact the economy. When rates trend lower, “we often see a psychological shift among buyers,” said Penelope Graham, a mortgage expert at RateHub.ca.

“Just having that edge taken off with lower interest rates often does spur more activity in the housing market, especially if people are of the ‘if I don’t move now, I’m going to miss out’ mindset,” she said.

How interest rates impact small businesses

Without the burden of high housing-related payments, consumers might devote more of their budget to buying goods and services, putting their money to work in other parts of the economy.

Those consumers “might have, for example, more disposable income to purchase more goods at retailers or purchase more experiences at hospitality businesses,” said Simon Gaudreault, chief economist and vice-president of research at the Canadian Federation of Independent Business.

WATCH | Why is the Bank of Canada cutting interest rates right now?:

Why cut interest rates during inflation? | About That

Central banks typically raise interest rates to get prices under control during times of inflation, but the Bank of Canada and the U.S. Federal Reserve just cut rates. Andrew Chang explains how Trump’s tariffs and a slumping job market led to the same inflection point for the countries’ duelling economies. Images provided by Getty Images, The Canadian Press and Reuters.

Plus, small businesses might be carrying their own variable rate mortgages or other loans (like a manufacturing company that borrowed money to buy expensive equipment).

If the rate goes down, “that’s good news for [those] business owners,” said Gaudreault.

But even as the central bank continues cutting rates, lower interest rates don’t automatically give businesses a cheery outlook.

The Bank of Canada recently asked businesses how they’re feeling about the economy, and the results were fairly subdued, particularly in the context of a trade war that has turned uncertainty into the new normal.

Business sentiment improves but firms still cautious amid U.S. tariffs, says Bank of Canada

As Gaudreault notes, businesses are struggling with labour shortages and rising operating costs (like insurance premiums), and the cost of resources have gone up with inflation and tariffs.

“There is so much uncertainty at the moment, such weakness in the economy that businesses have to be very, very careful with where they put their money,” said Gaudreault.

“There isn’t much money for new investments or new hiring. They keep their money to face all of those higher operating costs.”

How interest rates impact personal finances

When it comes to personal loans — like the car loan example from earlier — the cost of borrowing will come down with prime rates, said Shannon Lee Simmons, a Toronto-based certified financial planner and founder of the New School of Finance.

The cost of borrowing money with a credit card or credit line might also come down through cheaper debt payments, noted Simmons.

If the cost of borrowing on a line of credit is high, then a new homeowner might hold off on a renovation, for example. If rates go down, then they might use credit to fund that renovation.

A person holds a wallet with a Visa card peeking out.

The interest charged by credit card companies is also impacted by the benchmark rate. (Jenny Kane/The Canadian Press)

But lower interest rates might be less welcomed by Canadians who are trying to save and grow their money because financial institutions will pay consumers less to hold onto their cash.

Getting lower interest payouts from savings accounts and Guaranteed Investment Certificates (GICs) can feel “frustrating,” said Simmons.

“But if you are invested in the stock market and you hold fixed income products like bonds — typically speaking, when interest rates go down, bond prices will pop up. And so it really depends on your asset mix,” she said.

What else do I need to know about rate cuts?

“The relationship between interest rates and prices [depends] on how fast or slow the economy is growing relative to the economy’s ability to produce goods and services,” said DiCapua.

When demand outweighs supply — and the economy requires more workers, more capacity or more machinery than what’s available — that can lead to higher prices, he explained.

But it can take a while for any interest rate changes to flow through the economy. The traditional view among economists is that these changes take about a year and a half, according to DiCapua.

“That’s because, of course, the lending rate affects the banks, the banks then change their rates and then those rates — the prime rate that the banks use — then flow through the various financial instruments and loans through the system,” he said.

A woman and a man are shown seated next to each other while speaking during a news conference.

Bank of Canada governor Tiff Macklem started lowering the benchmark rate last summer. (Adrian Wyld/The Canadian Press)

He said the Bank of Canada’s interest rate decisions are a clear signal for Canadians who want to know “where the economy is going.”

That signal can influence the public’s confidence in the economy, which “can impact consumer behaviour, can impact business decision-making,” said DiCapua.

“That is sort of a soft power, as I’ll put it, that the Bank of Canada does have.”

ABOUT THE AUTHOR: Jenna Benchetrit, Journalist

Jenna Benchetrit is the senior business writer for CBC News. She writes stories about Canadian economic and consumer issues, and has also recently covered U.S. politics. She was part of the team that won a silver Digital Publishing Award in best news coverage for covering the 2024 U.S. election. A Montrealer based in Toronto, Jenna holds a master’s degree in journalism from Toronto Metropolitan University. You can reach her at jenna.benchetrit@cbc.ca.

With files from Anis Heydari