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 ongoing uncertainties surrounding trade negotiations with the United States and Mexico.
During a press conference in Ottawa, Governor Tiff Macklem stated that the central bank’s economic outlook has not significantly evolved since October. Macklem emphasized the heightened uncertainty in the forecast and the wider range of potential outcomes, citing unpredictable U.S. trade policies and elevated geopolitical risks.
The forthcoming review of the Canada-U.S.-Mexico Agreement (CUSMA) is identified as a critical source of economic uncertainty and a significant risk to Canada’s economic outlook, according to Macklem. He highlighted the shift from open, rules-based trade with the U.S. and emphasized the need for adaptation to the changing trade landscape.
In addition, Macklem warned that Canada’s efforts to diversify trade may not fully offset the structural damage caused by the U.S. trade war. The outcome of the CUSMA negotiation could influence future interest rate decisions, as the central bank’s current economic projections are based on the assumption of existing U.S. tariffs and certain trade exemptions under CUSMA.
Macklem also expressed concerns about threats to the independence of the U.S. Federal Reserve, stating that such uncertainties contribute to heightened economic risks globally. He voiced support for U.S. Fed Chair Jerome Powell, underscoring the importance of the Fed’s independence for the global economy and Canada in particular.
Economist Joseph Brusuelas predicted no further interest rate changes in the near term, but highlighted the potential contentious nature of the upcoming CUSMA review. Any policy adjustments by the central bank could lean towards rate cuts if economic conditions deteriorate or trade relations with the U.S. face significant disruptions.
Looking ahead, the Bank of Canada anticipates modest GDP growth in the coming years, with inflation hovering around the two percent target. While economic growth slowed in the fourth quarter due to U.S. tariffs impacting Canadian exports, domestic spending shows signs of improvement. Business investment is expected to rebound, despite previous uncertainties, and employment has seen recent gains, although the unemployment rate remains elevated.
The central bank projects annual GDP growth rates of 1.1 percent in 2026 and 1.5 percent in 2027, aligning with previous forecasts. Governor Macklem reiterated the bank’s readiness to adjust its monetary policy if the economic outlook shifts. The current interest rate is deemed appropriate to maintain inflation stability, but the bank remains vigilant and prepared to respond to changing conditions.
Avery Shenfeld, chief economist at CIBC Capital Markets, noted that the bank’s decision to keep rates steady reflects concerns over trade uncertainties and a slowdown in underlying inflation. The forecast suggests no interest rate changes in 2026, with a higher probability of a rate cut given the uncertain trade landscape and existing economic slack.