The Bank of Canada decided to maintain its key interest rate at 2.25 percent on Wednesday, in line with expectations following positive third-quarter data indicating the resilience of the Canadian economy amid trade tensions. Central bank governor Tiff Macklem stated that the current rate is conducive to supporting the economy during a structural transition while also keeping inflation near the two percent target rate. Macklem emphasized the high level of uncertainty and the readiness of the bank to adjust its stance if the economic outlook changes.
At the Bank of Canada’s October meeting, Macklem expressed concerns about potential structural damage to the Canadian economy from U.S. tariffs. However, recent data has shown stronger-than-expected performance, with third-quarter GDP and job growth surpassing projections and the unemployment rate falling to 6.5 percent in November. Inflation is slightly above two percent, while core inflation measures are trending towards three percent.
Although consumer spending and business investment were relatively flat in the third quarter, the Bank of Canada anticipates improved performance in the fourth quarter but expects overall economic growth to slow before picking up in 2026. Analysts, including Katherine Judge from CIBC, predict that the overnight rate will likely remain at 2.25 percent throughout next year.
The pending renewal of the Canada-U.S.-Mexico free trade agreement is another factor influencing economic activity, with expectations that clarity on the trade front will stimulate growth. Despite challenges faced by sectors like steel and lumber due to tariffs, the broader economy has demonstrated resilience. Macklem pointed to recent revisions in economic growth figures by Statistics Canada, suggesting that the Canadian economy was stronger than previously estimated before the trade conflict with the U.S.
While many Canadians are grappling with the rising cost of living, Macklem acknowledged that the bank aims to prevent overall price drops to avoid a severe recession. Senior deputy governor Carolyn Rogers emphasized the importance of maintaining inflation at target levels to support economic growth and affordability for Canadians in the long term. Deflation risks were highlighted as a concern that could lead to delayed consumer spending and cost-cutting measures by businesses.
Overall, the Bank of Canada’s decision to hold the interest rate steady reflects a balanced approach to supporting economic growth while navigating uncertainties in the global trade landscape and addressing domestic affordability challenges.