The Bank of Canada announced today that it is maintaining its policy interest rate at 2.25%. The decision was made as the Canadian economy continues to adjust to significant trade challenges, especially in light of steep tariffs imposed by the United States on sectors such as steel, aluminum, autos, and lumber.
Governor Tiff Macklem outlined three main messages during a press conference: “First, steep US tariffs on steel, aluminum, autos and lumber have hit these sectors hard, and uncertainty about US trade policy is weighing on business investment more broadly. But so far, the economy is proving resilient overall.”
He continued: “Second, inflationary pressures continue to be contained despite added costs related to the reconfiguration of trade. Total CPI inflation has been close to the 2% target for more than a year now, and we expect it to remain near the target.”
“Third,” he added, “in the current situation, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. Nevertheless, uncertainty remains high and the range of possible outcomes is wider than usual. If the outlook changes, we are prepared to respond.”
Statistics Canada recently revised economic growth figures for 2022-2024 upwards. This suggests that both demand and capacity were higher prior to recent trade conflicts with the US. After a contraction in GDP in the second quarter due mainly to lower exports, third-quarter GDP grew by 2.6%, which was stronger than expected but largely reflected volatility in trade rather than broad-based domestic strength.
Labour market conditions have shown some improvement; employment has grown over three consecutive months and unemployment fell to 6.5% in November. While job losses earlier in the year affected sectors sensitive to trade disruptions, stability has returned recently with other areas—particularly services—seeing gains.
On inflation trends, Governor Macklem said: “Inflation has evolved largely as expected. CPI inflation was 2.2% in October, and measures of core inflation remained in the range of 2½% to 3%. In the months ahead, we will see some choppiness in headline inflation, reflecting the temporary GST/HST holiday on some goods and services a year ago. This is likely to push inflation temporarily higher in the near term. Seeing through this choppiness, we expect ongoing economic slack to roughly offset cost pressures associated with the reconfiguration of trade, keeping CPI inflation close to the 2% target.”
The recent federal budget introduced increases in government spending focused on defense and public/private sector investment. The impact of these fiscal measures will be incorporated into future projections.
In summary of its assessment process since previous rate cuts this fall, Macklem stated: “After cutting the policy interest rate in September and October, Governing Council had indicated that if inflation and economic activity were to evolve broadly in line with the October projection, the policy rate would be about right. While information since the last decision has affected the near-term dynamics of GDP growth, it has not changed our view that GDP will expand at a moderate pace in 2026 and inflation will remain close to target. Governing Council therefore decided to hold the policy rate unchanged.” He also noted that keeping rates at “the lower end of the neutral range” would help support structural transition without increasing inflationary pressure.
Uncertainty remains high regarding future US trade policies and their effects on Canadian businesses; there are also concerns about how long it may take for economic adjustments following new tariffs.
“We will be assessing incoming data relative to our outlook. If a new shock or an accumulation of evidence materially change the outlook, we are prepared to respond,” said Macklem.
He concluded: “Increased trade friction with the United States means our economy works less efficiently, with higher costs and less income. This is more than a cyclical downturn—it’s a structural transition. Monetary policy cannot restore lost supply. But it can help the economy adjust as long as inflation is well controlled. The Bank of Canada is focused on ensuring Canadians continue to have confidence in price stability through this period of global upheaval.”
