The Bank of Canada building in Ottawa on Wednesday. The central bank is expected to hold its key rate at 2.25%, the lower end of what it considers to be a “neutral” level.
The Bank of Canada kept its benchmark interest rate unchanged at 2.25% on Wednesday, signaling what markets believe will be a lengthy period of stability. The decision ends a cycle of rate cuts in September and October and marks a shift toward a steadier monetary path after years of turbulence.
Central Bank Signals Steady Policy
Governor Tiff Macklem said the Canadian economy is “proving resilient overall,” even as U.S. tariffs weigh on trade. He added that the current 2.25% policy rate is “about the right level” to keep inflation near the 2% target while helping businesses and households navigate economic uncertainty.
The bank has cut rates four times this year, and nine times since mid-2024, but policymakers now expect to stay on hold through the first half of next year. Market projections show a possible quarter-point hike in fall 2026, according to Bloomberg data.
Monetary Policy on a Smoother Track
Canada appears to be entering a calmer monetary phase. The policy rate had previously plunged near zero during the pandemic, then surged to 5% to combat the sharpest inflation spike in four decades.
Despite the pause, Macklem said he remains prepared to adjust rates if the outlook shifts. “I’m not going to put our policy on a timeline,” he emphasized.
U.S. Federal Reserve Cuts Again
Hours after Canada’s announcement, the U.S. Federal Reserve delivered its third consecutive quarter-point cut, lowering the federal funds rate to 3.5%–3.75%.
Fed Chair Jerome Powell cited slowing U.S. hiring but warned another January cut is uncertain. The meeting saw three dissents—the most in six years—with one member pushing for a larger cut.
The contrast between U.S. uncertainty and Canada’s steady stance highlights the diverging economic conditions both countries face.
Canada’s Rate at Neutral Zone
At 2.25%, the Bank of Canada’s rate now sits at the lower end of its neutral range, meaning it neither stimulates nor restricts economic growth. This puts it half a percentage point above pre-pandemic levels.
Bank of Montreal economist Douglas Porter noted that the bank’s messaging aligns with expectations for no rate changes throughout 2026. He added that market chatter about future hikes may be premature due to U.S. trade uncertainty. Porter believes a rate cut in 2026 remains more likely than a hike.
Inflation Outlook Remains Calm
The bank expressed confidence that inflation pressures are contained. Headline inflation has hovered near 2% for a year, while underlying inflation sits around 2.5%.
Macklem warned of temporary volatility due to last year’s GST/HST holiday, which could push inflation higher in the coming months. However, he expects economic slack to offset cost pressures from shifting trade patterns.
Canadian Economy Shows Unexpected Strength
Despite U.S. tariffs affecting sectors like steel, aluminum, lumber, and autos, Canada’s economy has held up better than expected.
After a sharp contraction in the second quarter, GDP rebounded with 2.6% annualized growth in the third quarter. Upward revisions to past GDP data also revealed that Canada entered the current trade turbulence in stronger condition than previously thought.
The labour market mirrors this resilience. Canada added 180,000 jobs in three months, and unemployment dropped from 6.9% to 6.5%.
“There are certainly tariff scenarios that could have pushed us into recession,” Macklem said. “As we get to the end of the year, the R-word people are using is resilience.”
Recovery Still Slow and Uncertain
Despite encouraging signs, the Bank of Canada does not anticipate rapid economic improvement. Growth is expected to remain weak through the fourth quarter before picking up next year.
Macklem also noted that hiring intentions remain muted, despite strong recent job gains. “The Canadian economy is going through a difficult structural adjustment that will take time,” he said.
The bank’s rate hold may encourage more homebuyers and sellers to re-enter the market, but significant challenges remain as Canada continues navigating trade tensions and structural shifts.
