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 of the rate may be influenced by the uncertainties surrounding the ongoing free trade negotiations with the United States and Mexico.
Governor Tiff Macklem stated during a press conference in Ottawa that the central bank’s economic outlook has not changed significantly since October. He emphasized that while the forecast remains stable, there is heightened uncertainty and a wider range of potential outcomes due to unpredictable U.S. trade policies and increased geopolitical risks.
Macklem highlighted the upcoming review of the Canada-U.S.-Mexico Agreement (CUSMA) as a significant source of economic uncertainty and a key risk to Canada’s economic prospects. He acknowledged that the landscape of trade relations with the United States has shifted, necessitating adjustments on Canada’s part.
Addressing concerns about the impact of trade diversification efforts on the economy, Macklem cautioned that such efforts may not fully offset the structural damage caused by the U.S. trade dispute. He also noted that the central bank’s current economic projections are predicated on the assumption that U.S. tariffs against Canada will remain in place, with some exemptions under CUSMA maintaining limited free trade with the U.S.
Macklem expressed concerns about threats to the independence of the U.S. Federal Reserve, emphasizing the importance of a well-functioning Fed for global economic stability. He underscored the significance of supporting the Fed’s independence, particularly in light of recent pressures on Fed Chair Jerome Powell to lower interest rates.
Economist Joseph Brusuelas suggested that there may not be further rate changes this year, but the upcoming review of CUSMA could introduce contentious elements. Any potential policy shift by the central bank would likely lean towards rate cuts in response to slowing growth, increased labor slack, or further disruptions in economic relations with the U.S.
Looking ahead, the Bank of Canada anticipates modest GDP growth in 2026-2027, with inflation remaining close to the two percent target. While the economy experienced a slowdown in the fourth quarter due to ongoing U.S. tariffs, domestic spending is showing signs of improvement. Business investment, which had been hampered by uncertainty, is expected to pick up.
Despite recent increases in employment, Canada’s unemployment rate remains elevated at 6.8 percent, and few businesses are planning to hire in the near term, according to the Bank of Canada’s Business Outlook Survey. The central bank projects annual GDP growth of 1.1 percent in 2026 and 1.5 percent in 2027, aligning with its previous forecasts.
Governor Macklem reiterated that the current interest rate is appropriate for maintaining inflation close to target but affirmed the central bank’s readiness to adjust its stance if the economic outlook shifts. Analysts expect no interest rate changes in 2026, with a possibility of a rate cut outweighing a rate hike due to trade uncertainties and existing economic slack.