Bank of Canada cuts overnight rate to 2.5% after three holds, first cut since March

Following yesterday’s CPI report, which showed the Consumer Price Index rising 1.9% year-over-year in August (up from 1.7% in July), the Bank of Canada cut its overnight rate by 25 basis points to 2.5%. This marks its first rate cut since March.

“Three developments have shifted the balance of risks since the July decision,” said Governor Tiff Macklem during this morning’s announcement. “First, Canada’s labour market has softened. Secondly, upward pressure on underlying inflation has diminished. And third, with the removal of most retaliatory tariffs by Canada, there’s less upside risk to future inflation.”

Macklem further noted that while considerable uncertainty remains, the weaker economy and reduced inflationary risks led the governing council to conclude that a rate reduction was appropriate. The move, he said, aims to better balance the risks moving forward.

Canadian businesses avoid the worst of tariffs, but auto and manufacturing take a hit

In the second quarter of 2025, from April to June, the economy shrank by 1.6 per cent on an annualized basis.  

“The [GDP second quarterly] report clearly reflected the impact of the trade war, weighing heavily on net exports and business investment,” says Shelly Kaushik, senior economist and vice president of economics at the Bank of Montreal.

Exports plummeted by 7.5% in the second quarter, marking the steepest quarterly decline in five years. This downturn followed a stronger than expected first quarter, during which GDP grew by 2.2%.  

In Q1, businesses sped up their trade activity in anticipation of upcoming tariff increases. They exported goods at an unusually fast pace to avoid higher costs later and stockpiled inventories—building up supplies in advance to mitigate the impact of future tariffs.  

The majority of trade with the U.S. remains tariff-free under CUSMA rules of origin—88% in July, down from 92% in June. However, existing tariffs on products like steel and aluminum continue to weigh heavily on key industries, particularly automotive exports.

For instance, exports of passenger cars and light trucks plunged by 24.7% in the second quarter. Compounding this, business investment in new machinery and equipment declined by 0.6%, marking its first decrease since the pandemic.  

“Still, we expect trade-related pressures to ease in the coming months as clarity around tariffs improves,” says RSM economist, Tuan Nguyen. Even if tariffs remain, he says, the priority for the Bank is to provide businesses with a clear framework to help them understand and navigate the situation, keeping the market stable.  

Sticky inflation numbers

Earlier, in the July 2025 Monetary Policy Report, the central bank estimated that GDP would contract by approximately 1.5% in the second quarter of 2025. In reality it performed slightly worse than the report’s forecast.  

That being said, the GDP report for Q2 is a bit of a mixed bag, according to Kaushik. There were some bright spots in the GDP report domestically—household spending actually rose by a strong 4.5%.  

Kaushik explains that the while net exports took a hit, “the rest of the domestic economy was firmer: household spending rebounded, government spending/investment adding notably, and residential investment slowly recovering.” 

Unemployment rate rises to 7.1% in August

Unemployment hit 7.1% in August, the highest since May 2016 (excluding the pandemic years). After a solid June, when the economy added 83,000 jobs, the July report clawed back roughly half of those gains.  

“The average of the two months was decent, “Kaushik says. "And then the August numbers landed with a thud last week.”

She attributes the bleak jobs report to the trade war. August saw 43,000 job losses in manufacturing, transport and warehousing.

According to Nguyen, what’s more troubling is that weakness in the labour market has “started spilling over into the service sector, which is typically less sensitive to trade policies than the goods sector.”

Learn more: Ask the Expert: What’s your Canadian mortgage strategy in Trump’s tariff war? 

Will today’s cut position buyers to enter the real estate market?

“Since June 2024, the Bank of Canada has cut rates seven times,” says Kevin Wong, licensed realtor and mortgage agent at Swivel Mortgage. “Even with those cuts, transactions and prices have trended downward across Ontario, therefore I don’t think another cut will suddenly flip the market.”

However, Wong thinks today’s news is a step in the right direction and should boost activity and buyer confidence for the fall market.

According to the new REMAX 2025 Fall Housing Market Update, 54% of Canadians see this fall as a good opportunity to secure a deal. This comes as national home prices are forecasted to drop by an average of 6.5% through the season.

Ontario stands out as a buyer-friendly market, with two-thirds of its regions experiencing price declines between January and July 2025.  

According to Wong, sentiment is the key factor at play, with global economic uncertainty and trade tensions having a stronger impact on buyer psychology than interest rates.  

However, life doesn’t pause for ideal conditions. Those with stable finances, as well as individuals looking to upsize or relocate, are already seizing the opportunity presented by improved affordability, making them the “most active group”, according to Wong.

Read more: Ask the Mortgage Expert: Why this could be your window of opportunity into Canadian real estate 

Are first-time home buyers taking a step back this fall?

According to REMAX, only 7% of Canadians plan to buy their first home within the next year, with many waiting for further price drops or a modest rate cut to act.  

But while Wong agrees that first-time home buyers had originally been taking a step back from homebuying earlier in the year, he says that’s no longer the case. Softer pricing and higher inventory levels are pulling first-time home buyers back into the conversation.  

“They’re curious, asking questions, and setting up consultations again,” he says.

According to Nicole Lechter, a senior real estate analyst with RSM Canada, the debt-to-income ratio for Canadians under 35 dropped from 201% to 187% in the first quarter of 2025.  

This shift, she says, is giving younger buyers more financial breathing room to plan for homeownership.  

Encouragingly, many first-time buyers are arriving with strong savings. Nearly 28% have saved at least 20% for a down payment, while another 33% have saved at least 15%.

Families (upsizers) are another active segment. Wong says that with detached and freehold prices softening in many GTA neighbourhoods, “families who once felt priced out are now revisiting moves into their ideal neighbourhoods and school districts.”

“It's a great time to explore options and perhaps get your foot in the door, gain some equity and eventually use it as a springboard to move up the property ladder; especially if you're renting right now,” Wong says.  

Ultimately, the decision to buy comes down to your lifestyle, financial situation, and long-term goals, guided by careful planning and confidence in taking that first step.

Read next: Ask the Expert: Can the new Liberal housing plan solve Canada's housing crisis?