The Bank of Canada opted to keep its key interest rate at 2.25% on Wednesday, matching economist expectations as policymakers elected stability while the nation navigates volatile international trade conditions and rising US protectionism. The decision reflects a balance between recovering domestic demand and external risks that could weigh on the broader economic picture.
In prepared remarks, Governor Tiff Macklem underscored the precariousness of the environment, saying, "US trade policy remains unpredictable, and geopolitical risks are elevated." Officials noted that global financial conditions have stayed largely accommodative, a factor that has coincided with the Canadian dollar climbing above 72 cents following recent weakness in the US dollar.
Central bank commentary emphasized that the Canadian economy is undergoing a structural realignment as businesses adjust supply chains to avoid restrictive US tariffs. While the third quarter delivered robust expansion, the Bank warned that growth likely stalled in the final months of 2025 as a result of disruptions tied to trade tensions.
On inflation, the Bank reported that price pressures have remained anchored close to its 2% objective, with average inflation running at 2.1% over the past year. Governor Macklem stressed the limits of monetary policy in the face of trade shocks, stating, "Monetary policy cannot compensate for the structural damage caused by tariffs, and it cannot target hard-hit sectors of the economy." This language highlights the central bank's view that some trade-driven effects fall outside the scope of interest-rate tools.
Labour-market data presented a mixed picture in the Bank's assessment. The unemployment rate remained elevated at 6.8% despite evidence of hiring gains in the service sector. The Bank pointed to persistent high youth unemployment and cautious corporate hiring plans as factors that suggest excess supply in the labour market is counteracting price pressures stemming from increased trade costs.
Looking ahead, the Bank projected modest GDP growth of 1.1% for 2026 and 1.5% for 2027, while noting those outcomes are conditional on a successful navigation of the upcoming CUSMA review. Maintaining a cautious posture on future rate moves, Macklem added, "The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval."
Implications for markets and sectors
The Bank's statement signals continued sensitivity to external trade and geopolitical developments. Currency markets, trade-exposed manufacturers, and service-sector employers are among those likely to feel the effects of the central bank's assessment of the economic outlook.