This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on September 17, 2025.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on September 12, 2025. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, and Michelle Alexopoulos. Deputy Governor Rhys Mendes did not attend.
International economy
Governing Council members began their deliberations by discussing global economic developments since the July Monetary Policy Report. While the global economy had proven resilient to increased US tariffs in the first half of the year, there were increasing signs that economic growth was slowing.
In the United States, the strength in consumer spending appeared to have moderated, and the US labour market had softened. Recent monthly growth in non-farm payrolls had slowed, and historical revisions suggested less hiring over the past year. Slowing population growth has been weighing on consumption and is likely to continue to do so. Members noted that softer consumer spending in the United States would translate into weaker demand for Canadian exports.
US growth was being boosted by continued strength in business investment, largely stemming from investments in artificial intelligence (AI) data centres. These investments were expected to lead to productivity gains across the US economy, supporting continued growth. However, the recent important contribution of AI investment to growth might not continue if sentiment about the returns from AI investment were to soften.
Inflation in the United States remained somewhat elevated with growing evidence of some pass-through of tariffs to consumer prices.
In the euro area, growth had moderated because US tariffs were affecting trade. China’s economy slowed in the second quarter. Exports had held up better than expected despite a significant drop in shipments to the United States in recent months. Members noted the significant recent decline in fixed-asset investment in China and uncertainty about whether this weakness will persist.
Financial conditions had loosened since the July Report, with higher equity prices, steady credit spreads and lower bond yields. The US dollar had depreciated against most global currencies, but the Canadian-US dollar exchange rate had remained relatively stable since July. Global oil prices were close to the levels assumed in the July Report.
Canadian economy and inflation outlook
Members then turned their attention to recent economic developments in Canada since the July Report.
Tariffs and trade uncertainty continued to weigh on the economy, which contracted in the second quarter as expected. Exports had declined by 27% after being pulled forward by firms getting ahead of tariffs in the first quarter. Growth in business investment was also negative in the second quarter. Businesses reported that they are in a wait-and-see mode, given the unpredictability of US trade policy.
However, household spending was stronger than expected in the second quarter. Consumption growth, both in aggregate and per person, was robust and broad-based. Housing resale activities and housing starts both grew overall from low levels, although there were some important regional differences. Members discussed the extent that slower population growth and a softer labour market going forward could dampen growth in household spending. They also expected weak business investment to continue to weigh on economic growth in the second half of the year.
Members spent time discussing recent labour market dynamics. Overall, members agreed that the labour market had softened. Most labour market indicators were weaker than their benchmark ranges. The unemployment rate had risen from 6.6% in February to 7.1% in August. Employment declined by more than 100,000 jobs in July and August, with job losses concentrated in sectors that rely on US trade. However, employment growth in other parts of the economy had also slowed, as businesses had scaled back their hiring intentions. Wage growth continued to ease. Members were concerned that continued tariffs and ongoing uncertainty about US trade policy could lead to further labour market weakness across the economy.
Consumer price index (CPI) inflation data for August were published by Statistics Canada during the deliberations. Headline inflation came in at 1.9%, the same as at the time of the July Report. When indirect taxes are excluded, inflation was 2.4%, and the preferred measures of core inflation (CPI‑trim and CPI‑median) remained elevated at about 3%.
Members reviewed a broad range of inflation indicators and agreed they continued to point to underlying inflation of around 2½%, including the following:
- CPI excluding food, energy and taxes was 2.4%.
- CPIX was 2.6%.
- The share of CPI components growing above 3% was 39%. At this rate, inflation tends to be about 2½%.
Governing Council members agreed that the latest inflation data indicated that upward momentum in core inflation seen earlier in the year had dissipated. This could be seen most clearly in the three- and six-month rates of inflation in the preferred core measures that had been running above 3% earlier in the year. Three-month rates of core inflation were 2.4% (CPI‑trim) and 2.6% (CPI‑median), and six-month rates were both 2.8%. Members also agreed that the federal government’s recent decision to remove most retaliatory tariffs on imported goods from the United States will mean less upward pressure on the prices of these goods going forward. Members did not have new information on inflation expectations.
Considerations for monetary policy
Governing Council members turned their attention to the risks and uncertainties facing the Canadian economy and the outlook for inflation.
First, members discussed the effects of ongoing trade uncertainty on the Canadian economy. While near-term uncertainty around US tariffs had diminished, uncertainty around the renegotiation of the Canada–United States–Mexico Agreement (CUSMA) was coming into greater focus. This was likely to impede a recovery in business investment in the near term. In addition, the growing use of US tariffs as an instrument of geopolitical pressure on other countries was keeping global uncertainty elevated.
Members discussed whether the recent strength in household spending would continue, given the softening of the labour market and low consumer confidence. Consumption per person returned to the level seen prior to the COVID-19 pandemic after an extended contraction that had ended in 2024. Past cuts to the policy interest rate may have been a contributing factor. Members agreed that consumption should continue to support growth going forward. Overall, the economy was expected to grow modestly, roughly in line with the current tariff scenario outlined in the July Report.
Members continued their discussion from the July meeting about the appropriate role for monetary policy in the context of a shock that affects both demand and supply.
The shift in US trade policy was clearly affecting demand for Canadian goods and services. Economic growth could slow further while the adjustment in business investment and jobs plays out. However, the Council also recognized that this weakness reflects an economy adapting to a large structural change—many sectors are adjusting to the new global trading environment. Monetary policy is not well suited to structural shocks.
Given the uncertainty surrounding the impact of these structural changes on demand and supply, members acknowledged it was particularly difficult to assess the amount of slack in the economy. The outlook for inflation was therefore subject to greater uncertainty than usual. At the same time, slowing population growth in Canada will continue to weigh on potential growth. As a result, members agreed that they would need to proceed carefully in adjusting the stance of monetary policy.
Members recognized that, based on recent government statements, federal and provincial investment in infrastructure and support for sectors and workers affected by tariffs would be likely greater than in the July Report scenarios. As usual, once federal and provincial spending plans are tabled, Governing Council would review the overall macroeconomic impact and incorporate it into their outlook.
With respect to inflation, members agreed that the upside risks to inflation had diminished. Upward momentum in underlying inflation appeared to have turned. Also, most counter-tariffs on US goods had been removed. This meant there was no longer a significant risk that the cost of tariffs would be passed on to Canadian consumers and create a knock-on effect to other prices. Lower input costs from labour, shipping and materials would also likely mean lower inflationary pressures going forward.
Members stressed that while the upside risks had diminished, they had not gone away. Trade disruptions implied new costs. How big these costs would be, when and where they might materialize, and what they could mean for inflation all remained uncertain. The reconfiguration of Canada’s trading architecture meant the economy would be working less efficiently, adding costs. Also, tariffs on imports into the United States could spill over into greater price pressures in Canada, given that many goods from other countries transit through the United States before arriving in Canada.
Overall, Governing Council members agreed that the Canadian economy had weakened in the face of trade disruptions, while the upside risks to inflation had diminished.
Policy decision
Members discussed the appropriate stance for monetary policy at this time, given the risks and uncertainties affecting the economy and inflation. They discussed two options: maintaining the policy interest rate at 2.75% or lowering it by 25 basis points to 2.5%.
Members discussed arguments for maintaining the policy rate at 2.75%. Measures of core inflation were still elevated at about 3%. Strong consumption growth in the second quarter could be an indication of stronger momentum in consumer spending. Trade policy uncertainty was still high, and the impact of structural changes to the Canadian economy on growth and potential output were difficult to assess. As well, the size and persistence of the costs related to the disruption in trade and how these would be passed through to consumer prices was uncertain. Finally, members recognized that past cuts to the policy rate were still spreading through the economy.
Governing Council members then noted three primary developments since the July decision that supported cutting the policy interest rate. First, the economy had weakened, with further softening in the labour market. Second, there was more evidence from recent monthly inflation readings that the upward pressures on core inflation may be easing. Third, the removal of most retaliatory tariffs by Canada also meant there was less upside risk to future inflation.
In reviewing all these factors, Governing Council judged that the balance of risks had shifted in favour of cutting the policy rate. The economy was weaker and, while there were still some mixed signals, inflationary pressures appeared more contained. Members therefore decided to reduce the policy rate to 2.5% to better balance the risks going forward.
Members agreed that they would continue to emphasize that, with uncertainty still high, they would be guided by their assessment of the risks to inflation. They also agreed they would continue to look over a shorter horizon than usual and take a risk management approach. They recognized there were risks on both sides and agreed they would be ready to respond to new information.
Finally, given the relative stability with respect to US tariffs since the July Report, members expected they would be able to present a baseline projection for growth and inflation in the October Monetary Policy Report.