Insights & Resources

Canadian economy looks for support from lower interest rates

The Bank of Canada announced that it was lowering administered interest rates by 25 basis points (a basis point is 1/100th of one percent) at the conclusion of its September 17, 2025, monetary policy meeting. As can be seen in the accompanying graph, this was the first move by the Bank since March 12 of this year. On the same day, the U.S. Federal Reserve (Fed) cut interest rates by the same amount. However, this was the first interest rate cut by the Fed since December 18, 2024. 

Domestically, the range for overnight borrowing was set at 2.50% to 2.75%, with the official benchmark Bank Rate at 2.75%. Stateside, the target for the federal funds rate was set in the range of 4.00% to 4.25%. It is not surprising that policy rates are being set lower in Canada as continued weakness in both business investment and productivity has accompanied a softening in the broader employment picture since the first move to provide a greater separation between administered interest rates in Canada and the U.S. on June 5, 2024. 

This “spread” has gone from 12.5 basis points at that juncture to 137.5 basis points. Far greater economic uncertainty prevails in Canada. International trade disruptions continue to make headlines, but perhaps of greater concern to the Bank of Canada is the recent move up in inflation. The CPI was up 2.4% (year over year) in September, well above the 1.9% pace posted in August. In addition, the three Bank of Canada core inflation measures remained elevated in September, ranging from 2.7% to 3.2%. It remains to be seen how much lower rates can go with inflation moving in the opposite direction.

U.S. economy remains strong

The U.S. Bureau of Economic Analysis announced that real gross domestic product (GDP) expanded by 3.8% (quarter over quarter annualized) in the second quarter of 2025. This is the “third estimate” and represents an upward revision to the 3.3% figure that was previously reported. In the first quarter of 2025, real GDP contracted by 0.6% (revised from 0.5%) on the same basis. The most recent reading was the strongest since the third quarter of 2023 (+4.7%) and was the eleventh gain in the previous twelve quarters. The update primarily reflected a downturn in imports and an acceleration in consumer spending that were partly offset by a downturn in investment. In either case the year-over-year growth rate of 2.1% suggests a healthy economy.

Longer View

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