Canada Prime Rates

Bank of Canada Cuts Policy Rate Amid Trade Tensions and Inflation Challenges

Following the Bank of Canada's decision to reduce its policy rate by 0.25% to 2.50%, the prime lending rate declined to 4.70%. This move reflects the Bank’s effort to support a weakening domestic economy while remaining cautious about persistent inflation pressures. Core inflation continues to exceed the Bank of Canada's 2% target, with CPI-trim and CPI-median around 3%, indicating underlying price pressures remain sticky. However, declines in oil prices and the elimination of the consumer carbon tax are helping to moderate headline inflation, which currently sits at 1.9%. Shelter and food remain key contributors to inflation, though shelter inflation has eased recently, with rent and mortgage interest costs rising by 4.5% and 4.2% year-over-year in August, respectively. Meanwhile, both the Canadian and global economies are showing signs of strain. The labour market is softening, with unemployment rising to 7.1%, although there have been no broad-based layoffs. Economic momentum has slowed, and Q2 2025 GDP contracted by 0.4%, following modest growth in previous quarters.

Bank of Canada Cuts Policy Rate Amid Trade Tensions and Inflation Challenges

• Canada continues to face significant trade tensions with its largest trading partner, creating uncertainty and disruptions in key export sectors.
• Some industries have secured USMCA compliance certification and avoided tariffs, while others remain exposed to new trade barriers.
• U.S. tariffs exert a modest disinflationary effect on Canadian prices, while Canada's retaliatory tariffs contribute to inflationary pressures, especially in food categories.
• Trade frictions have weakened business confidence and slowed investment, adding to economic headwinds and dampening growth prospects.
• The overall reduction in trade activity is expected to suppress demand across the economy, reinforcing disinflationary forces and complicating the Bank's policy calculus.

The Bank of Canada is carefully assessing the timing and magnitude of inflationary and disinflationary forces stemming from U.S. trade policies. While these effects may largely offset each other, the decision to cut rates reflects growing concern over domestic economic weakness and the need to balance inflation control with employment and financial stability. Importantly, while the nominal policy rate is 2.5%, the real interest rate—adjusted for underlying inflation—is near zero, which is considered expansionary. A neutral real rate is typically estimated between 0.5% and 0.75%, suggesting that monetary policy is now tilted toward supporting growth rather than restraining inflation.

The Prime rate in Canada is currently 4.70%. The Prime rate is the interest rate that banks and lenders use to determine the interest rates for many types of loans and lines of credit. These can include credit cards, HELOCs, variable-rate mortgages, car and auto loans, and much more. If you have any of these loans, changes in the prime rate will also change your debt payments and thus your GDS and TDS ratios.