By Promit Mukherjee and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada reduced its key overnight interest rate to 2.25% on Wednesday, as widely expected, and signaled this could mark an end to its cutting cycle unless the outlook for inflation and economy changed.
The 25 basis point cut, the second in row, brings down the rate to the lowest since July 2022.
Governor Tiff Macklem said the easing was designed to help the economy deal with the disruption done by U.S. tariffs while keeping inflation
close to the bank's 2% target.
In January the bank had forecast the economy would grow by 1.8% in both 2025 and 2026. But citing U.S. trade policy, it now says growth in 2025 will be just 1.2%, dropping to 1.1% in 2026, before recovering to 1.6% in 2027.
"If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment," the bank said in its rate announcement.
Macklem said the while the trade war was depressing demand, it had also added costs for many businesses. The bank expected these forces to offset each other, he told reporters.
Canada's economy contracted in the second quarter by 1.6% and early indicators suggest it might barely avoid another contraction in the third quarter.
"The weakness we're seeing in the Canadian economy is more than a cyclical downturn. It is also a structural transition," Macklem said, adding this limited the ability of monetary policy to boost demand while keeping inflation at 2%.
The bank sees annualized growth of 0.5% in the third quarter and 1% in Q4. It returned on Wednesday to the practice of issuing detailed quarterly economic forecasts after suspending them in March due to economic uncertainty.
The BoC aims to keep the rate of annual inflation anchored at 2%, the mid-point of its 1% to 3% target range.
In its forecasts, the bank estimated inflation would average 2% over the year. Consumer prices are expected to average around 2.1% in 2026, the bank said.
Macklem said the range of possible outcomes remained wider than usual as U.S. trade policy continued to be unpredictable.
"We need to be humble about our forecast. If the outlook changes, we are prepared to respond," he said.
The Canadian dollar firmed and was trading up 0.22% to 1.3915 to the U.S. dollar, or 71.86 U.S. cents. Money markets are not pricing in any probability of rate cuts until March next year.
(Reporting by Promit Mukherjee)
