The Bank of Canada keeps the benchmark interest rate unchanged at 2.25%, with uncertainty limiting the rate path.
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On January 28, the Bank of Canada announced that it would keep its benchmark interest rate unchanged at 2.25%, marking the second consecutive meeting with no change, in line with broad market expectations. Governor Tiff Macklem made it clear that they are unsure how long the rate hike pause will last, nor are they certain about the future direction of borrowing costs.
Macklem stated in his announcement:
"The Canadian economy is adjusting to structural headwinds brought about by US protectionism. The governing council believes that the high degree of uncertainty makes it difficult to predict the timing or direction of the next rate adjustment."
Nonetheless, the central bank emphasized that the current policy rate is "still appropriate," as long as economic developments remain roughly in line with current forecasts, and reiterated that it is "ready to respond."
In its accompanying monetary policy report, the central bank's forecast for economic growth was largely "in line" with last October’s, projecting 1.1% growth in 2026 and 1.5% in 2027. The report pointed out that, while growth picks up in the fourth quarter of 2025, the damage caused by last year’s tariff shock was not as severe as expected, so the 2025 economic growth estimate was raised to 1.7%.
The central bank noted that industries affected by tariffs cut production and jobs in early 2025, with negative impacts clearly evident in the labor market. While the employment situation improved in the second half of the year, the unemployment rate remained at a "high level" of 6.8%, youth unemployment continued to rise, and the number of businesses planning to hire was reduced. Regarding inflation, the central bank expects the inflation rate to stay around the 2% target in the near term, believing that "cost pressures from trade are offset by excess supply."
After the decision was released, the USD/CAD exchange rate continued to drop by more than 0.2%. The bond market experienced short-term volatility, with 10-year government bond yields climbing to 3.427% and 2-year yields rising to 2.595%, both hitting intraday highs. The Canadian stock market was closed for a holiday that day.
High Uncertainty in Policy Outlook
The central bank's statement delivered a typical "neutral and wait-and-see" signal. Policymakers prefer to keep borrowing costs unchanged until the direction of US tariff policy and its actual impact on the Canadian economy becomes clearer. At the same time, the central bank deliberately pushed back the market's expectations that "interest rates will remain on hold for a long time," even leaving open the possibility for either the next move to be a hike or a cut.
Macklem explained the twofold basis for his cautious stance. He said, "US trade policy remains unpredictable, and geopolitical risks are high." At present, "it is too early to judge how Canada’s economy will adapt to current tariffs and ongoing uncertainty," and he sees the upcoming review of the CUSMA (US-Mexico-Canada Agreement) as a key risk.
On the other hand, he cited two possible scenarios in the baseline assumptions: If "the transition to the new trade environment is smoother than expected and spending by businesses and households is stronger," the economy could outperform expectations; conversely, if "the labor market weakens due to the lagged effects of trade shocks, leading to further declines in household spending," or "market confidence rebounds and triggers tighter financial conditions," downside pressures may emerge.
Raising Growth Expectations
Headline inflation for December was 2.4% year-on-year, boosted by a base effect due to a temporary sales tax cut last winter. At the same time, the central bank noted that its preferred core inflation metric has fallen to an annual rate of about 2.5%.
The central bank's latest forecast raised the potential economic growth rate for 2025 from 1.6% to 2.3%, and based on this, it judged that "the amount of slack in the economy is largely unchanged." According to its forecast, the output gap is expected to persist until the end of 2027.
On the demand side, the central bank believes past interest rate cuts and increases in disposable income will support household spending. Consumption is expected to boost GDP growth by 0.7 and 0.6 percentage points in 2026 and 2027, respectively, both higher than last October's forecast.
As businesses gradually adapt to the new trade environment and the government increases infrastructure spending, business investment is also expected to strengthen. The central bank forecasts that fixed investment by businesses will contribute 0.1 percentage points to GDP in 2026 and 0.3 percentage points in 2027, roughly in line with previous projections.
Limitations of Monetary Policy
Macklem emphasized:
"Economic restructuring, including building more reliable trade relationships and deepening domestic market integration, will support our long-term productive capacity, but this will take time to achieve gradually."
He explicitly pointed out the limitations of monetary policy:
"Monetary policy cannot fix structural damage caused by tariffs, nor can it accurately offset severe shocks to specific sectors of the economy."
Regarding the inflation outlook, the central bank identified the main risk directions in its report: upside risks include a faster-than-expected absorption of excess supply or higher restructuring costs incurred by businesses to cope with US tariffs; downside risks include the economy being hit harder by trade shocks than expected, or financial conditions tightening more than currently anticipated.
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