The Bank of Canada cut its benchmark interest rate a quarter point to 2.5 per cent, as concern over weaker economic growth outweighed lingering worries over inflation. Governor Tiff Macklem offered no guidance over what he might do next, stressing the uncertainty of a situation in which tariffs are both raising costs and killing demand.

Jobs, jobs, jobs: Macklem said there was a “clear consensus” among his deputies to cut interest rates after they watched employment drop for two consecutive months this summer, pushing the jobless rate to 7.1 per cent. Most of the job losses are in industries that rely heavily on U.S. trade, but Macklem noted that hiring has begun to slow throughout the economy and that wage growth has eased. “Many businesses have told us they have paused investment plans given elevated uncertainty about U.S. trade policy,” Macklem said in prepared remarks. “Businesses are also concerned that demand in Canada will weaken as the economic fallout broadens.”

Peak inflation: The Bank of Canada’s sole job is to keep inflation in check, which it does by raising and lowering interest rates to keep the consumer price index advancing at a year-over-year rate of about two per cent. The task is more difficult than it sounds. Policymakers must anticipate where costs are headed because it takes time for interest rate changes to spread through the economy. 

Inflation is currently hotter than the central bank would like, as “core” measures that filter out volatility suggest underlying inflation is around 2.5 per cent. However, Macklem said upward pressure appears to have “dissipated,” noting that the federal government’s decision to drop a suite of retaliatory tariffs will reduce upward pressure on costs. There’s little conviction in the Bank of Canada’s assessment of inflation, but for now, embers appear to have cooled enough to focus on economic growth.

Event horizon: Many Bay Street economists anticipate this cut will be the first of at least a couple before the end of the year. But monetary policy is far from settled. Macklem offered few clues on whether those outlooks for additional cuts are correct. Notably, the central bank dropped language from its policy statement that implied policymakers were leaning towards cutting rates if inflation cooled. 

Macklem said the central bank will “look over a shorter horizon than usual, and be ready to respond to new information.” The new global trade regime has raised the cost of business and it remains unclear how that will feed into consumer prices. Governments are setting up to spend tens of billions of dollars, something Macklem told reporters the central bank will assess as fiscal plans become “more concrete.” At the same time, Canada’s economy is teetering on the edge of recession, meaning deflationary pressures could emerge. Macklem has little choice but to adapt to this new environment one step at a time.