Bank of Canada Holds Policy Rate as Economy Faces Trade-Driven Uncertainty

In its latest monetary policy update, the Bank of Canada has chosen to maintain its policy interest rate at 2.25%, signaling continuity amidst persistent economic uncertainty.

The central bank notes that its forecasts for economic growth and inflation have remained largely unchanged since the previous outlook in October. The Canadian economy continues to be challenged by US trade restrictions, resulting in only modest GDP growth and inflation expected to hover near the bank’s 2% target. Despite recent strength in certain sectors, overall economic growth stalled in the last quarter, with exports especially impacted by US tariffs. Domestic demand is gradually strengthening, and household spending is expected to rise moderately, aided by past interest rate cuts and higher disposable incomes. However, business investment remains restrained, and while government infrastructure spending could bring some relief, employment in sectors affected by tariffs has declined, keeping unemployment at a high 6.8%.

The inflation rate, which averaged 2.1% last year, reached 2.4% in December due to specific short-term factors, but core inflation measures have eased slightly. The Bank expects inflation to remain close to target as tariff-related cost increases are balanced by excess supply in the economy. Nonetheless, the outlook is increasingly uncertain, with risks stemming from unpredictable US trade policy, elevated geopolitical tensions, and the forthcoming review of the Canada-United States-Mexico Agreement.

While the Bank’s Governing Council believes the current interest rate is suitable given the present economic conditions, it emphasizes the difficulty in forecasting the timing or direction of any future rate changes. As the economy adapts to the realities of increased protectionism and restructures its trade relationships, the Bank of Canada stresses that monetary policy can offer support but cannot offset the full impact of tariffs or sector-specific disruptions. Maintaining confidence in price stability, despite global uncertainties, remains a central priority for the Bank.

This decision underscores the cautious stance of policymakers as Canada navigates an environment of heightened external risks and economic adjustment.