**Bank of Canada Governor Tiff Macklem announced a rate cut on Sept. 17. / SCREENSHOT**

Economists say the Bank of Canada remains cautious on inflation despite lowering its key interest rate on Wednesday for the first time since March.

The central bank reduced its overnight rate by 25 basis points, from 2.75% to 2.5%, a move largely in line with market expectations. Governor Tiff Macklem cited a softening labour market and weak second-quarter GDP as the rationale for the cut, noting that Canada’s economy is “veering toward recession” after six months of U.S. tariffs.

“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,” Macklem said in a statement. He also warned the “disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity.”

Economists cautioned inflation remains a central concern, despite the rate cut. Frances Donald, chief economist at RBC, told BNN Bloomberg, summarized the BoCs position as “(inflation) risks have been diminished relative to where they were a couple months ago, they noted reciprocal tariffs are no longer in play for Canadians, and some pressure on the labour market.”

Job ‘not done’ on inflation

But she added core inflation remains above 3%. “That’s quite a distance from the two per cent target,” she said. “Looking at (the) breadth of inflationary pressures, those are still quite large and inflation expectations amongst businesses in Canada… it still looks like the job is not done on the inflation front.”

Robert Kavcic, senior economist at BMO Capital Markets, said the removal of counter tariffs gave the BoC “a green light” to resume easing. “The last thing the Bank of Canada (wanted) was to… cut interest rates to a level that’s too stimulative and at the same time you start to get pass-through of tariffs to consumer prices and it gets the wheels of inflation in Canada spinning again,” he told BNN Bloomberg.

This week’s rate reduction comes after three consecutive holds, reflecting Macklem’s cautious approach amid ongoing trade uncertainty and persistent core inflation. Economic data show GDP contracted by 1.6% in Q2, unemployment rose to 7.1% in August, and certain trade-impacted sectors, particularly manufacturing, continue to experience weakness.

“Economic weakness has been clearly concentrated in a handful of trade-impacted sectors, and the ability of monetary policy to counteract that impact is limited,” RBC senior economist Claire Fan noted. “But it has also raised concerns about broader domestic spending in the coming months as the labour market weakens and population growth slows.”

While household consumption showed resilience in Q2, investment contracted and housing prices continue to decline, leaving room for additional rate cuts if economic conditions deteriorate further. Analysts caution that upcoming employment, inflation, and trade data will be critical in shaping the BoC’s next moves.

Forward guidance from the BoC was limited, with Macklem emphasizing the bank will respond to new information “over a shorter horizon than usual.” Kavcic suggested that further easing is likely: “The balance of risk does probably suggest we’re going to get another 50 basis points of easing. Even if it’s on a quarterly basis I suspect that by the time we get to the spring of 2026 we could very well have policy rates down at two per cent.”