The Bank of Canada opted to maintain its key interest rate at 2.25 percent on Wednesday, a move that was widely predicted following positive third-quarter data indicating the Canadian economy had weathered trade war disruptions. Bank Governor Tiff Macklem stated that the current rate is conducive to fostering economic growth while also keeping inflation near the targeted two percent rate.
Despite the favorable economic indicators, Macklem emphasized the presence of high uncertainty and a broader range of potential outcomes. He assured that the bank stands ready to act should the economic outlook change significantly. During the October meeting, Macklem had cautioned about the structural damage the Canadian economy could suffer due to U.S. tariffs, noting that monetary policy alone might not suffice to address the issues.
The economy has shown resilience since then, surpassing expectations with GDP and job growth outperforming in the third quarter while the unemployment rate dropped to 6.5 percent in November. Inflation remains slightly above two percent, with core inflation measures trending closer to three percent. However, consumer spending and business investment were relatively stagnant in the third quarter, although projections suggest an improvement in the fourth quarter before a slowdown in overall economic growth, expected to pick up in 2026.
Katherine Judge, a senior economist at CIBC, anticipates that the Bank of Canada will maintain the overnight rate at 2.25 percent throughout next year. The uncertainty surrounding the renewal of the Canada-U.S.-Mexico trade agreement is a key factor influencing economic activity, with expectations of a significant uptick once clarity is achieved.
Macklem attributed the economy’s resilience to recent revisions made by Statistics Canada to economic growth figures in previous years, indicating a healthier economic state before the impact of the U.S. trade conflict. While certain sectors face challenges from tariffs, the rest of the economy continues to operate with minimal tariffs from the U.S., with Canada having one of the lowest average tariff rates globally.
Acknowledging that many Canadians are feeling financial pressure, Macklem highlighted concerns over the cost of living and inflation. A survey revealed that a significant portion of Canadians struggle to keep up with household expenses. Both Macklem and senior deputy governor Carolyn Rogers emphasized the importance of maintaining stable price levels to avoid a recession, underscoring the need to support ongoing economic shifts and wage growth to address affordability challenges for Canadians.
