The Bank of Canada has lowered its key interest rate by 25 basis points to 2.5 per cent, a move that comes as trade tensions and global uncertainty continue to weigh on Canada’s economy.

The rate cut was widely expected after new inflation data showed consumer prices rising 1.9 per cent in August compared to a year earlier. This is the first cut since March, and policymakers say it’s aimed at helping balance risks as growth slows.

Governor Tiff Macklem explained that U.S. tariffs are hitting Canada’s auto, steel, and aluminum sectors, while Chinese tariffs on canola, pork, and seafood have further hurt business investment. GDP slipped about 1.5 per cent in the second quarter, with exports falling 27 per cent after a strong first quarter surge when businesses rushed to ship goods before tariffs took effect.

On the positive side, household spending and housing activity were stronger than expected in the spring, but looking ahead, slower population growth and a cooling labour market could weigh on consumers.

“The recent removal of most Canadian retaliatory tariffs on U.S. goods will ease some price pressures, but with a softer economy and fewer inflation risks, the Governing Council agreed a rate cut was the right step,” Macklem said.

While the decision was unanimous, the central bank will keep a close watch on how tariffs and trade uncertainty continue to shape growth and inflation in the months ahead.