Intelligent Investment

Interest Rate Cuts Resume

Canada Monthly Market Commentary - September 2025

September 30, 2025 2 Minute Read

The Bank of Canada made its first interest rate cut since March, decreasing the policy rate by 25 bps to 2.50% this month. After pausing over the last few months due to the heightened uncertainty around global trade, the central bank’s justification for this return to lowering interest rates was a weakening economy and lower upside risks to inflation. Canada’s GDP had contracted by an annualized rate of 1.6% in Q2 2025 and the labour market has been softening with employment losses recorded in recent months. Meanwhile, despite core inflation holding near 3%, the recent removal of retaliatory tariffs on U.S. imports means there will be less upwards pressure on inflation going forward. The combination of these factors led to this month’s interest rate cut, however, the Bank of Canada was purposefully vague on guidance regarding its next moves. Instead, the central bank will be “proceeding carefully”, continuing to assess economic conditions and responding accordingly. Market consensus currently expects one more cut before the end of the year and then for the policy interest rate to hold at 2.25% throughout most of 2026.

In the U.S., the Federal Reserve also resumed interest rate cuts which had been on pause all year. Following the 25 bps decrease this month to 4.00-4.25%, interest rates in the U.S. are expected to be cut twice more in 2025 then again in 2026 and 2027. With more cuts in store for U.S. monetary policy, this is expected to narrow the Canada-U.S. interest rate gap and support a stronger Canadian dollar over the coming years.

While there was some stability in U.S. tariffs earlier in the month, the U.S. Administration has since launched another salvo of targeted tariffs. Despite ongoing legal challenges to other tariffs, the U.S. continues to pursue its trade strategy and most recently announced new levies on pharmaceutical drugs, heavy-duty trucks and some furniture that go into effect on Oct. 1st. For Canada, trade negotiations with the U.S. are said to be ongoing but talks are shifting into the upcoming CUSMA review. At the same time, Canada has been looking to strengthen its economic ties with other trading partners like Mexico and Europe.

Economic Highlights:

  • GDP in July 2025 rebounded following the contraction in Q2 2025, rising 0.2% month-over-month.
  • Employment fell by 65,500 jobs in August 2025 and the unemployment rate rose to 7.1%.
  • Headline inflation rose slightly to 1.9% in August 2025 with core measures holding near 3.0%.

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