OTTAWA (Dow Jones) -- The Bank of Canada on Wednesday cut its benchmark interest rate by a quarter percentage point to 2.5%, trying to add juice to an economy squeezed by the Trump administration's shift in U.S. trade policy.

The decision marks a resumption of rate cuts for Canada's central bank, after a six-month pause as officials worried about tariffs fueling a rise in inflation. Gov. Tiff Macklem said data suggest that upward momentum in core inflation -- which strips out volatile items like food and energy -- has "dissipated," and Canada's decision to abandon most retaliatory tariffs on U.S. products "will mean less pressure on the prices of these goods going forward."

A softening labor market also persuaded senior policymakers that a rate cut was required, Macklem said. Canada's unemployment rate jumped in August to its highest level in nine years, excluding the Covid-19 pandemic period, and job vacancies hit a seven-year low in the second quarter. The weaker labor market, alongside lower population growth, is expected to weigh on household spending in the coming months, the governor said.

"There was a clear sense that the balance of risk had shifted," Macklem said at a press conference in Ottawa. "Tariffs are weakening the Canadian economy."

Macklem, however, wasn't forthcoming on guidance. He said senior policymakers would proceed carefully on rate decisions, warning the fallout from the Trump administration's trade policy could still trigger another run-up in prices. Macklem added the central bank would be operating on a shorter time horizon than usual and is prepared to move should risks to the economy change.

"We are not expecting a recession," said Macklem, noting the economy contracted in the second quarter. He said the central bank expects 1% growth in the second half of the year. "It's not going to feel good, [but] it is growth."

Nearly all economists surveyed last week by The Wall Street Journal predicted a cut to 2.5%, and the majority expect at least one more rate reduction before the end of the year. Following the rate decision, economists said the lack of guidance indicates the central bank finds itself in a bind, trying to balance the stiff headwinds to domestic growth against the inflationary pressure from tariffs as companies rewire supply chains and seek non-U.S. markets for their goods.

"The disruptive effects of shifts in trade will add costs even as they weigh on economic activity," Macklem said. "It is difficult to predict the extent of cost increases, where they will show up, and how they could be passed through to consumer prices."

The Bank of Canada's mission is to set rate policy to achieve and maintain 2% inflation, or the midpoint of a 1%-to-3% target range. Headline inflation is presently below 2%, but the central bank's preferred measures of core prices have been around 3% for several months -- although short-term readings suggest some softening.

The Canadian economy contracted 1.6% at an annual rate in the second quarter, fueled in part by a 27% drop in exports. Canada is among the economies most exposed to President Trump's hefty tariffs, as roughly one-fifth of Canada's output is tied to trade with the U.S. The bulk of Canada's U.S.-bound exports are entering duty-free, as they comply with the terms of the U.S.-Mexico-Canada trade treaty, known as USMCA.

However, Canadian-made automobiles, steel and aluminum still face U.S. tariffs of up to 50%, and those sectors have absorbed the biggest hit from U.S. trade policy, Macklem said. The central banker warned that hefty tariffs from China on Canadian canola, new U.S. duties on copper, and higher U.S. duties on Canadian lumber threaten to spread the pain further.

This week, the Trump administration kicked off the process to review, and either potentially renew or renegotiate USMCA, which analysts say will add another layer of uncertainty over the Canadian economy.

"We continue to believe that the general direction for interest rates is lower," said Charles St-Arnaud, chief economist at Alberta Central, a lobby group for credit unions. "However, with the Canadian economy no longer deteriorating but not rebounding, the timing of a cut will likely depend on whether the labor market continues to deteriorate and on further easing in underlying inflationary."

Uncertainty about trade is dampening business investment in Canada. Spending by Canadian companies on machinery and equipment, on an inflation-adjusted basis, fell in the second quarter to its lowest level in more than four decades, according to calculations from National Bank Financial. Firms have scaled back capital spending due to uncertainty over tariffs, and concerns that demand in Canada will weaken further as the fallout broadens, Macklem said.