The Bank of Canada building in Ottawa on Wednesday. The central bank is expected to hold its key rate at 2.25%, the lower end of what it considers to be a “neutral” level.Sean Kilpatrick/The Canadian Press
The Bank of Canada held its benchmark interest rate steady on Wednesday, moving back to the sidelines for what financial markets expect to be an extended pause.
As widely anticipated, the central bank’s governing council kept the policy rate at 2.25 per cent, after cuts in September and October.
The Canadian economy is “proving resilient overall” in the face of U.S. tariffs, Governor Tiff Macklem said in a news conference after the announcement.
In that environment, he said, the bank believes the benchmark rate is “at about the right level” to keep inflation close to the 2-per-cent target while helping the Canadian economy adjust to the disruption to North American trade caused by U.S. protectionism.
Having lowered interest rates four times this year – and nine times since the summer of 2024 – the bank is now expected to remain on hold through the first half of next year. Financial markets are betting the bank’s next move will be a quarter-point hike in the fall of 2026, according to Bloomberg data.
Earlier: Updates on Bank of Canada and Federal Reserve rate announcements
In effect, monetary policy appears to have returned to a steadier glide path after several years of volatility, during which the bank cut the policy rate to near zero at the start of the pandemic then raised it rapidly to 5 per cent in an attempt to contain the biggest burst of inflation in 40 years.
Mr. Macklem said he was still prepared to adjust interest rates in either direction if there is a material change in the bank’s economic outlook. “I’m not going to put our policy on a timeline,” he said, when asked about market expectations.
Later Wednesday afternoon, the U.S. Federal Reserve cut its benchmark interest rate by a quarter-point for the third consecutive time, bringing the federal funds rate to a range of 3.5 per cent to 3.75 per cent.
Fed chair Jerome Powell said the decision came in response to a slowdown in U.S. hiring, but suggested another cut in January was not guaranteed.
“We’re well positioned to wait and see how the economy evolves from here,” Mr. Powell said in a news conference.
Nine out of 12 members of the rate-setting Federal Open Market Committee supported the cut. Of the three dissenters, two argued for a hold and one – Stephen Miran, a recently appointed ally of U.S. President Donald Trump – argued for a larger cut. This was the first time in six years in which there were three dissents to a Fed rate decision.
While the trajectory for U.S. interest rates remains uncertain, the path for Canadian monetary policy appears to have stabilized, at least for the coming quarters.
At 2.25 per cent, the policy rate is now at the lower end of what the bank considers to be a “neutral” level that neither stimulates nor constrains economic activity. This is half a percentage point above where the policy rate was right before the outbreak of the pandemic in 2020.
“We shifted our call to no rate changes for all of 2026 recently, and today’s messaging from the bank appears aligned with that view,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients.
“Markets have quickly begun to consider when rates may begin to head higher, especially given the turn in soft guidance from other central banks – most notably Australia’s. However, Canada is still dealing with the heavy cloud of U.S. trade uncertainty,” Mr. Porter wrote. “We continue to believe that there is a greater chance of a BoC rate cut than a hike in 2026, even if the most likely outcome is no move at all.”
When it comes to inflation, Canada’s central bankers sounded relatively sanguine on Wednesday, arguing that upward pressure on consumer prices remains contained. Headline inflation has been running around 2 per cent for the past year, while the bank believes underlying inflation is closer to 2.5 per cent.
“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,” Mr. Macklem said.
“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-per-cent target.”
Bank of Canada’s interest rate hold may bring homebuyers and sellers off the sidelines
The Bank of Canada’s decision to pause its easing cycle follows a string of data suggesting the Canadian economy is weathering the trade war with the United States fairly well.
Some industries, including steel, aluminum, lumber and automobiles, have been hit hard by U.S. tariffs. And business investment across many sectors is constrained by uncertainty.
But over all, the Canadian economy is proving surprisingly sturdy. After a steep contraction in the second quarter, led by a collapse in exports, Canadian gross domestic product grew at an annualized pace of 2.6 per cent in the third quarter.
Some of this growth was the result of a statistical quirk tied to a swing in trade numbers. But the headline result was much stronger than expected, and a large upward revision to GDP numbers for the past three years suggests the Canadian economy was in better shape than realized heading into the current period of trade turmoil.
Likewise, the labour market remains weak, but is trending in a positive direction. Canada added around 180,000 jobs over the past three months, and the unemployment rate fell to 6.5 per cent in November from 6.9 per cent the month before.
“There are certainly scenarios for U.S. tariffs that could have pushed the Canadian economy into recession,” Mr. Macklem said. “As we get to the end of the year, the R-word people are talking about is resilience.”
Still, the bank is not expecting a quick economic turnaround. It expects GDP growth to be weak in the fourth quarter, before picking up pace next year. And Mr. Macklem downplayed the three strong monthly jobs reports, warning that business hiring intentions remain muted.
“The Canadian economy is going through a difficult structural adjustment that is going to take some time,” he said.