The Bank of Canada has decided to maintain its key interest rate at 2.25 percent for the second consecutive meeting, with potential changes looming due to ongoing trade negotiations with the U.S. and Mexico. Governor Tiff Macklem stated that the central bank’s economic outlook has not significantly shifted since October, but uncertainties have increased, leading to a broader range of potential outcomes. He highlighted the unpredictable nature of U.S. trade policies and heightened geopolitical risks.
The upcoming review of the Canada-U.S.-Mexico Agreement (CUSMA) poses a significant economic uncertainty and risk for Canada, according to Macklem. He emphasized the need to adapt to the changing trade landscape with the U.S., acknowledging that the era of open, rules-based trade has ended. Macklem also warned that the structural damage caused by the U.S. trade war cannot be completely offset by Canada’s trade diversification efforts.
Macklem indicated that the central bank’s economic projections are based on the assumption of ongoing U.S. tariffs against Canada and some exemptions under CUSMA. However, the outcome of the CUSMA review could alter this scenario and impact future interest rate decisions. Heightened economic uncertainty, including threats to the independence of the U.S. Federal Reserve, is a significant concern for Canada and the global economy.
Despite modest GDP gains expected in 2026-27, the Bank of Canada anticipates that inflation will remain close to its two percent target. Economic growth faces challenges from U.S. protectionism, impacting Canadian exports, while domestic spending shows signs of improvement. Business investment, which had slowed due to uncertainty, is expected to recover. Although employment has risen recently, Canada’s unemployment rate remains high at 6.8 percent, with few businesses planning to increase hiring in the near future.
The Bank of Canada projects annual average GDP growth of 1.1 percent in 2026 and 1.5 percent in 2027, aligning with previous forecasts. Governor Macklem reiterated that the current interest rate is appropriate for maintaining inflation near target but emphasized readiness to adapt to changing conditions. Economists suggest that uncertainties in trade negotiations may lead to a cautious approach, with the likelihood of no interest rate changes in 2026 but a higher probability of a rate cut.