The Bank of Canada has opted to keep its benchmark interest rate unchanged at 2.25 per cent, signalling cautious optimism in the face of ongoing economic challenges, including U.S. protectionist measures. In a statement released following their meeting, Governor Tiff Macklem acknowledged the complex landscape shaped by international trade policies and geopolitical tensions, which have created significant uncertainty regarding future monetary decisions.
Current Interest Rate Steady at 2.25%
In a widely anticipated move, the Bank of Canada’s governing council decided to maintain the current policy rate, which has remained stable since October. Governor Macklem emphasised that this rate is “appropriate” given the outlook for slow but positive economic growth alongside subdued inflation rates. However, he refrained from offering definitive guidance on when the next policy shift might occur, reflecting the unpredictable nature of the current economic climate.
“Uncertainty around our forecast is heightened,” Macklem stated, adding that the potential range of outcomes is broader than usual. He highlighted the unpredictability of U.S. trade policies and the elevated geopolitical risks as contributing factors to this uncertainty.
Economic Landscape and Growth Projections
The Bank of Canada is grappling with a particularly intricate economic environment. U.S. tariffs have adversely affected Canadian exports, undermining confidence among businesses and leading to a downturn in investment and hiring practices. The unemployment rate currently stands at 6.8 per cent, with younger workers and those in industries impacted by tariffs experiencing the greatest challenges.
After a robust rebound in gross domestic product (GDP) during the third quarter of 2025, the central bank has revised its expectations, anticipating that GDP growth will stagnate in the fourth quarter. This shift is attributed to volatility in trade and fluctuations in business inventories. According to the bank’s latest Monetary Policy Report, issued on Wednesday, future growth prospects appear muted, primarily due to uncertainties in trade and slow population growth. The GDP is projected to expand by just 1.1 per cent in 2026 and 1.5 per cent in 2027, figures that remain largely unchanged from previous forecasts.
The Impact of Trade Policy on Inflation
A significant concern for the Bank of Canada is how ongoing economic disruptions will influence consumer prices and inflation rates. Current Consumer Price Index (CPI) inflation is recorded at 2.4 per cent, slightly above the bank’s target of 2 per cent. This increase is largely attributed to atypical year-over-year price comparisons influenced by the 2024 GST and HST tax holiday.
Despite these pressures, the bank anticipates that inflation will ease in the coming months, stabilising around the 2 per cent target as economic slack hampers companies’ ability to pass on cost increases arising from tariffs and supply chain disruptions. Notably, the central bank expects a reduction in food price inflation due to a recent slowdown in growth across food supply chains.
“Most cost indicators are now rising at a pace broadly consistent with inflation around 2 per cent,” the bank noted in its report.
Future Outlook and Monetary Policy Response
Governor Macklem insisted that the bank is prepared to adjust interest rates if there are significant shifts in the inflation or growth outlook. However, he reiterated that traditional monetary policy tools are not ideally suited to address the structural damage inflicted by tariffs. “Monetary policy cannot compensate for the structural damage caused by tariffs, and it cannot target hard-hit sectors of the economy. But it can play a supporting role, helping the economy through this period of structural change while maintaining inflation close to the 2 per cent target,” he explained.
As Canada navigates this challenging economic landscape, the Bank of Canada faces critical decisions that will shape its monetary policy in the months to come.
Why it Matters
The Bank of Canada’s decision to maintain the interest rate underscores the precarious state of the Canadian economy, heavily influenced by external factors such as U.S. trade policies and global geopolitical tensions. As uncertainty looms, the bank’s cautious stance highlights the need for a strategic approach to bolster economic stability and foster growth in a landscape marked by unpredictability. The implications of these decisions will resonate throughout the economy, affecting everything from consumer spending to business investment, underscoring the importance of closely monitoring both domestic and international developments.
