The Bank of Canada cut its key interest rate to 2.5 per cent this week, the first reduction since March, as the economy shows signs of slowing and the risk of recession grows.

The decision followed back-to-back months of steep job losses, more than 100,000 jobs over July and August, bringing unemployment to 7.1 per cent, the highest level in nearly a decade outside the pandemic. The economy also shrank in the second quarter at an annualized pace of 1.6 per cent. Inflation ticked slightly higher in August, rising to 1.9 per cent, but it remains comfortably within the central bank’s target range. With trade tensions reducing exports and U.S. tariffs creating new uncertainty, policymakers decided that keeping rates higher would do more harm than good to households and businesses already under pressure.

The move comes as Ottawa continues to expand spending on housing, infrastructure and national projects. While such initiatives are designed to spur growth, they are often funded by borrowing, which raises long-term fiscal pressures. Large programs also take time to deliver results, meaning the short-term lift to the economy can be limited.

Businesses meanwhile face persistent regulatory delays in sectors such as mining, energy and manufacturing. These hurdles raise costs, increase risks and discourage investment, leaving firms hesitant to commit to new projects. Studies have linked the growing number of rules to slower productivity, weaker job growth and reduced business spending.

Global trade tensions add another layer of strain. Tariffs and anti-dumping measures imposed by the United States and China have cut into Canadian exports, further reducing business confidence. While some retaliatory tariffs have been rolled back, the damage to trade flows has already contributed to the slowdown.

Together, these pressures have created a fragile environment. The Bank’s rate cut marks a shift from its earlier fight against inflation toward supporting economic growth. Whether Canada tips into recession will depend on how households, businesses and global markets respond in the coming months.