The Bank of Canada has decided to maintain its benchmark interest rate at 2.25 percent for the second consecutive meeting. However, the future trajectory may be subject to change due to uncertainties arising from ongoing trade negotiations with the U.S. and Mexico. Governor Tiff Macklem stated during a press conference in Ottawa that the bank’s economic outlook has not significantly changed since the October projection. Nevertheless, increased uncertainty and a wider range of potential outcomes are now evident, largely due to the unpredictable nature of U.S. trade policies and elevated geopolitical risks.
The upcoming review of the Canada-U.S.-Mexico Agreement (CUSMA) presents a significant source of economic uncertainty and is deemed a crucial risk to Canada’s economic prospects, according to Macklem. He acknowledged the shift away from open, rules-based trade with the U.S., emphasizing the need for adaptation to this new reality. Macklem cautioned that while Canada’s efforts to diversify trade may partially offset the damage caused by the U.S. trade war, it won’t eliminate the structural impact on the economy.
Macklem highlighted that the current economic projections of the central bank are based on a scenario where U.S. tariffs on Canada remain in effect, and specific exemptions under CUSMA sustain some level of free trade with the U.S. However, this could change pending the outcome of the review. Additionally, ongoing threats to the independence of the U.S. Federal Reserve are contributing to heightened economic uncertainty globally, including in Canada.
In terms of GDP growth expectations for 2026-2027, the central bank anticipates modest gains, with the inflation rate likely to remain near its two percent target. Despite a strong third quarter, economic growth is expected to have slowed in the fourth quarter due to the impact of U.S. tariffs on Canadian exports. Domestic spending is showing signs of improvement, and the central bank foresees a recovery in business investment, which has been sluggish amid the prevailing uncertainties.
Employment has seen an uptick in recent months, but Canada’s unemployment rate remains high at 6.8 percent, with few businesses planning to increase hiring in the near future, as per the Bank of Canada’s Business Outlook Survey. The central bank projects average GDP growth of 1.1 percent in 2026 and 1.5 percent in 2027, aligning with the forecasts made in the October Monetary Policy Report.
Governor Macklem reiterated that the current interest rate is deemed appropriate to maintain inflation close to the target. However, the bank stands ready to adjust its stance should the economic outlook shift. While the decision to keep rates unchanged was expected, some concerns remain about economic growth due to trade uncertainties and a slowdown in underlying inflation trends.
Avery Shenfeld, chief economist at CIBC Capital Markets, noted that the central bank’s assessment aligns with expectations, leaning towards growth concerns amidst trade uncertainties and a reassuring deceleration in underlying inflation. Shenfeld maintained a forecast of no interest rate changes by the Bank in 2026, with a higher likelihood of a rate cut than a hike, given the uncertainties in trade negotiations and prevailing economic slack.
