The Bank of Canada has opted to maintain its benchmark interest rate at 2.25 percent for the second consecutive meeting, amidst ongoing uncertainties related to trade negotiations with the U.S. and Mexico. Governor Tiff Macklem, speaking at a press conference in Ottawa, highlighted that the central bank’s economic outlook has not substantially changed since its October projection. However, he emphasized that the level of uncertainty has increased, with a wider range of potential outcomes due to unpredictable U.S. trade policies and heightened geopolitical risks.
The upcoming evaluation of the Canada-U.S.-Mexico Agreement (CUSMA) poses a significant economic uncertainty and is considered a key risk to Canada’s economic outlook, according to Macklem. He acknowledged that the era of open, rules-based trade with the U.S. has ended, necessitating adjustments to the new trade environment. Macklem also cautioned that Canada’s efforts to diversify trade may not fully offset the structural damage caused by the U.S. trade war.
Macklem noted that the central bank’s current economic forecasts are based on the assumption that U.S. tariffs against Canada persist while CUSMA-related exemptions maintain some level of free trade with the U.S. However, he indicated that this scenario could change pending the outcome of the CUSMA review. Additionally, ongoing challenges to the independence of the U.S. Federal Reserve are contributing to heightened economic uncertainty globally, including in Canada.
The central bank anticipates modest GDP growth in the coming years, with the inflation rate expected to remain close to the targeted two percent. Despite challenges from U.S. protectionism impacting Canadian exports, domestic spending is showing signs of improvement, and business investment is projected to pick up. Employment has seen recent gains, but the unemployment rate remains elevated at 6.8 percent, with limited hiring plans by businesses in the near term.
Looking ahead, the Bank of Canada foresees annual average GDP growth of 1.1 percent in 2026 and 1.5 percent in 2027, aligning with its previous projections. Governor Macklem reiterated that the current interest rate is appropriate to maintain inflation near the target level but emphasized the central bank’s readiness to adjust its stance based on evolving economic conditions. Economists anticipate no interest rate changes in 2026, with a potential for a rate cut given uncertainties in trade negotiations and lingering economic slack.