The

Bank of Canada

cut its policy rate by 25 basis points on Wednesday to 2.5 per cent, citing a weaker

Canadian economy

and less upside risk to inflation as reasons for the move.

“Considerable uncertainty remains,”

Bank of Canada governor Tiff Macklem

said, according to a statement. “But with a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks going forward.”

Wednesday’s rate cut was widely expected by economists, after the Canadian economy contracted in the second quarter and the labour market lost a cumulative 100,000 jobs in July and August, pushing the unemployment rate up to 7.1 per cent. Macklem said there was a “clear consensus” among policymakers to lower the rate this time.

Macklem noted U.S. tariffs are having a profound effect on key Canadian sectors including auto, steel, aluminum, copper and softwood lumber. The canola industry also faces significant tariffs from China.

“Uncertainty is also weighing on the economy,” he said. “Business investment contracted in the second quarter. Many businesses have told us they have paused investment plans given the elevated uncertainty with U.S. trade policy.”

While consumption has shown signs of resilience, the central bank expects slow population growth and a weak labour market to weigh on household spending.

In the meantime, the bank said recent inflation data suggest the upward pressure on inflation is easing and the federal government’s removal of retaliatory tariffs on U.S. goods means less upside risks to inflation in the future.

Statistics Canada reported inflation in August was 1.9 per cent.

“Preferred measures of core inflation have been around three per cent in recent months, but on a monthly basis, the upward momentum seen earlier this year has dissipated,” said Macklem.

Still, Macklem said the central bank expects shifts in trade to impact prices, but is not sure how those cost pressures will play out.

“It is difficult to predict the extent of cost increases, where they will show up, and how they could be passed through to consumer prices,” he said.

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Looking forward, Macklem said the bank will continue to assess the impact of tariffs and uncertainty on economic activity and inflation, noting that while near-term uncertainty may have come down a little, next year could present new challenges.

“But the focus is shifting to the upcoming review of the Canada-United-States-Mexico-Agreement,” he said. “New U.S. threats to use tariffs as an instrument of geopolitical pressure are also contributing to global uncertainty.”

• Email: jgowling@postmedia.com