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Investing.com -- The Bank of Canada cut its benchmark interest rate by 25 basis points to 2.25% on Wednesday, bringing rates down for the second consecutive meeting amid mounting economic headwinds. Governor Tiff Macklem said the move reflects “ongoing weakness in the economy and contained inflationary pressures,” as Canada grapples with the fallout from escalating US protectionism.

In its October Monetary Policy Report, the central bank projected that Canada’s GDP would grow just 1.2% in 2025, followed by a modest 1.1% in 2026 and a slight pickup to 1.6% in 2027. The Bank warned that the domestic economy is undergoing more than a cyclical slowdown, describing the situation as “a structural transition” driven largely by persistent trade conflicts with the United States.

Economic data showed the Canadian economy contracted 1.6% in the second quarter due to a sharp drop in exports and weak business investment. Macklem noted that US tariffs are “having severe effects on targeted sectors including autos, steel, aluminum and lumber,” while a weak hiring landscape has pushed the unemployment rate to 7.1%.

The Bank maintained that inflationary pressures remain moderate, with September’s CPI inflation at 2.4%, slightly higher than forecasted. Core inflation metrics have held around 3%, but broader indicators suggested underlying inflation is closer to 2.5%. “We expect these opposing forces to roughly offset, keeping inflation close to the 2% target,” Macklem said.

The Bank’s latest projection assumes that global growth will slip from 3.25% in 2025 to 3% by 2027, as protectionist policies reorient global trade and suppress investment. While the US economy has benefited from an AI-driven investment boom, softer employment growth and rising consumer prices are also showing signs of strain from trade actions. European and Chinese economies are also cooling, with exports under pressure and business sentiment weakening.

Canadian consumer spending, however, remained relatively buoyant in the second quarter, offering one of the few bright spots. Still, the Bank acknowledged that “the entire path for GDP is lower than it was before the shift in US trade policy,” with lost capacity and weaker demand each accounting for half of the GDP revision. Governor Macklem added that “the US trade conflict has diminished Canada’s economic prospects.”

Monetary policy, officials emphasized, is limited in its ability to counter structural damage from trade frictions. “Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income,” Macklem said. The Bank will continue monitoring developments closely and signaled readiness to adjust policy if needed.

Against a backdrop of international uncertainty, the Bank of Canada stressed its commitment to price stability and economic resilience. As Macklem concluded, “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.”