**‘Monetary policy cannot undo the damage caused by tariffs,’ Bank of Canada Governor Tiff Macklem said during a press conference Oct. 29. / SCREENSHOT**

The Bank of Canada’s decision to lower its key interest rate by a quarter of a percentage point to 2.25% may be the final cut for now, as the Bank works to steady a slowing economy strained by trade disruptions, economists say.

Several factors helped justify Wednesday’s decision, including slow growth, a “sluggish” labour market with 7.1% unemployment and “ongoing trade uncertainty,” Robert Kavcic, senior economist at BMO said in a research note. But, “inflation came in firmer than expected in September, and the Bank continues to believe that underlying core inflation is running around 2.5%.”

Another factor working in favour of a pause is the expectation that a “wave of fiscal stimulus” is set to hit the economy, Kavcic said. The central bank “has talked up the necessity of fiscal policy to lead in this environment, rather than blunt rate cuts,” Kavcic said.

It marked the second-consecutive rate cut from the Ottawa-based central bank, and the fourth this year. Policymakers say the economy is in a structural adjustment phase, meaning further loosening is unlikely unless the data worsens significantly.

“Monetary policy cannot undo the damage caused by tariffs,” Bank of Canada Governor Tiff Macklem said during a press conference. Increased trade friction with the U.S. means “our economy will work less efficiently, with higher costs and less income. Monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path.”

“That’s likely it, for now, for Bank of Canada easing,” said Kavcic, though a weak job market “leaves the door open for some further support,” and another quarter-point cut is still on the table for early 2026.

About the right level

Claire Fan, senior economist at RBC, echoed that view, saying the Bank has shifted toward a holding bias. “Governing Council sees the current policy rate at about the right level,” Fan said, “assuming future economic and inflation data evolve largely in line with current projections.”

“The Bank emphasized concerns about structural economic damage from trade disruptions, reducing the effectiveness of monetary policy as a tool in addressing weakening demand while maintaining inflation control,” Fan said. A ramp up in fiscal stimulus “will do the bulk of the heavy lifting in the policy response to address tariff-related, concentrated economic weakness.”

In Wednesday’s Monetary Policy Report, the central bank said the rate cut was warranted given “ongoing weakness in the economy and inflation expected to remain close to the 2% target.” But it warned that “the structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation.”

Canada’s economy contracted 1.6% in the second quarter, with exports and business investment hit by the tariffs. U.S. trade actions and related uncertainty “are having severe effects on targeted sectors including autos, steel, aluminum, and lumber,” and GDP growth is expected to be weak in the second half of the year, the central bank said.

It projects GDP growth of 1.2% in 2025, 1.1% in 2026, and 1.6% in 2027, and expects potential output growth to slow to 1.6% in 2025 and 1.0% in 2026 before edging up again to 1.3% in 2027. Inflation is expected to hover near 2%, with core measures around 2.5%.

Fan warned that the projected slowdown in potential growth “will reduce the productive capacity of the Canadian economy and erode the effectiveness of monetary policy.” As the economy’s capacity shrinks, “it will become increasingly difficult for the Bank of Canada to lower interest rates to stimulate demand without risking that demand will exceed what the economy can produce, thereby causing inflation.”

Both Fan and Kavcic said fiscal policy will need to shoulder more of the responsibility for supporting the economy. Fan expects “new spending to focus on expanding the economy’s capacity limits” to be outlined in the Nov. 4 budget.