The Bank of Canada has decided to maintain its key interest rate at 2.25 percent for the second consecutive meeting. Governor Tiff Macklem mentioned that the economic outlook has not significantly changed since October but highlighted increased uncertainty due to factors like unpredictable U.S. trade policy and heightened geopolitical risks.
The upcoming review of the Canada-U.S.-Mexico Agreement (CUSMA) poses a significant economic uncertainty and risk for Canada. Macklem emphasized the need for the country to adjust to the changing landscape of trade relations with the U.S. as open, rules-based trade dynamics shift.
He acknowledged that Canada’s attempts to diversify trade may not fully offset the structural damage caused by the U.S. trade war. The outcome of the CUSMA negotiation could influence future interest rate decisions, according to Macklem, as the current economic projections factor in existing U.S. tariffs and trade exemptions under CUSMA.
Macklem also expressed concerns about threats to the independence of the U.S. Federal Reserve, citing potential global economic repercussions. He recently supported U.S. Fed Chair Jerome Powell amid pressure to lower interest rates, stressing the importance of the Fed’s autonomy.
Economist Joseph Brusuelas predicted no further rate changes this year, but highlighted the potential contentious nature of the upcoming CUSMA review. Any policy adjustments by the central bank could lean towards rate cuts in response to slowing growth or strained economic relations with the U.S.
Looking ahead, the Bank of Canada anticipates modest GDP growth in 2026-27, with inflation expected to align closely with the two percent target. While U.S. tariffs have impacted Canadian exports, domestic spending shows signs of improvement, and business investment is projected to pick up despite existing uncertainties.
The central bank projects annual average GDP growth rates of 1.1 percent in 2026 and 1.5 percent in 2027, in line with previous forecasts. Governor Macklem reiterated the bank’s readiness to adjust policies if the economic outlook shifts, emphasizing the importance of maintaining inflation near target levels.
Avery Shenfeld, chief economist at CIBC Capital Markets, noted that the decision to maintain the current interest rate reflects concerns about economic growth uncertainties. He suggested that the bank is more likely to consider rate cuts than hikes in light of trade negotiation challenges and prevailing economic slack.
