Bank of Canada Governor Tiff Macklem, shown during a news conference on Wednesday, said 'elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate.'Adrian Wyld/The Canadian Press
The Bank of Canada held interest rates steady on Wednesday and said that erratic U.S. trade and foreign policy makes it difficult to determine the timing, or direction, of any further interest rate moves.
Governor Tiff Macklem also offered a blunt assessment of the rapidly changing world order, where rules-based trade with the United States is over, the independence of the U.S. Federal Reserve is at risk, and investors are losing confidence in the U.S. dollar.
As widely anticipated, the central bank’s governing council voted to keep the benchmark policy rate at 2.25 per cent, where it has been since October.
Mr. Macklem said this level “remains appropriate,” given the bank’s outlook for slow, but positive economic growth, and subdued inflation. But with U.S. sabre-rattling over trade and territorial expansion increasing in recent weeks, the outlook for the Canadian economy – and interest rates – remains opaque.
“Uncertainty around our forecast is heightened and the range of possible outcomes is wider than usual,” Mr. Macklem said in a press conference after the rate announcement. The consensus on the governing council “was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate.”
Bank of Canada governor Tiff Macklem warned that a loss of independence at the U.S. Federal Reserve would have knock-on effects north of the border and around the world.
The Canadian Press
Financial markets expect the bank to remain on hold through 2026, and market pricing barely budged after the rate announcement.
Later Wednesday afternoon, the U.S. Federal Reserve also held interest rates steady after three consecutive cuts. Fed Chair Jerome Powell gave few indications of when the central bank might cut again, noting that it was “well positioned” to make decisions “meeting by meeting.”
While Mr. Macklem offered no guidance about the trajectory for interest rates, he spent considerable time describing the challenges ahead for the Canadian economy, as businesses are forced to seek out new markets and rejig supply chains, while entire industries reorient to deal with U.S. protectionism.
“It’s clear that the era of open rules-based trade with the United States is over,” Mr. Macklem said, echoing similar comments by Prime Minister Mark Carney. “The Canadian economy needs to adjust to those things. We think that has started. We think it’s going to take some time, and through that period, growth will be modest.”
The bank’s latest forecast, published on Wednesday in its quarterly Monetary Policy Report, sees subdued economic activity held back by trade uncertainty and slow population growth.
After a healthy rebound in gross domestic product growth in the third quarter of 2025, the bank now thinks GDP growth flatlined in the fourth quarter, with volatility driven by sharp swings in trade and business stockpiling. The bank expects GDP to grow by 1.1 per cent in 2026 and 1.5 per cent in 2027.
This forecast remains highly conditional on U.S. trade policy, particularly the outcome of the upcoming review of the North American free-trade pact, the USMCA, which Mr. Macklem flagged as an “important risk to the outlook.”
In recent days, U.S. President Donald Trump and his lieutenants have threatened 100-per-cent tariffs on Canadian goods if Ottawa pursues deeper trade ties with China, and suggested that the USMCA talks could get rough for Canada.
“We will stick to our forecast of no interest rate moves by the Bank of Canada in 2026, but we see the odds of a further cut as more likely than a hike, given the potential minefield of trade negotiations ahead, and a starting point that still shows significant economic slack,” CIBC economists Ali Jaffery and Avery Shenfeld wrote in a note to clients after the rate announcement.
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Protectionist trade policy is not the only risk emanating from south of the border, Mr. Macklem said. Attempts by Mr. Trump to undercut the independence of the Federal Reserve – which include criminal investigations into Mr. Powell and Fed governor Lisa Cook – could reverberate through global markets.
“A loss of independence of the Fed would affect us all, and for Canada, our financial markets are particularly integrated with the United States, so it would particularly affect us,” Mr. Macklem said.
In recent weeks the U.S. dollar has depreciated sharply against other currencies, including the Canadian dollar, as investors have begun to look for alternatives to hedge against the economic and political chaos coming from Washington.
“International investors, they still want exposure to U.S. equities,” Mr. Macklem said. “But that safe haven role of the U.S. dollar has been dented. People don’t want as much exposure to the U.S. dollar. They’re hedging more of that ... and at the same time, you’re seeing other safe havens, most notably gold, up a lot.”
A stronger Canadian dollar compared to the Greenback could put downward pressure on inflation in Canada, but it may also hurt export competitiveness at a moment when Canadian exporters are already being dinged by tariffs.
When it comes to inflation, the central bank sounded relatively sanguine on Wednesday.
Annual Consumer Price Index inflation ticked up to 2.4 per cent in December — above the bank’s 2-per-cent target. But the increase was driven mostly by unusual year-over-year price comparisons owing to the 2024 GST and HST tax holiday.
The bank expects overall inflation to slow further in the coming months and to remain around 2 per cent through the year. And importantly from a cost-of-living perspective, the bank expects food and rent inflation to ease.
“It’s striking how close headline inflation is to the 2-per-cent target straight through from 2025 to 2027, masking the considerable churning beneath the surface on the inflation front,” Bank of Montreal chief economist Douglas Porter said in a note to clients. “Overall, the bank’s view on inflation is a tad dovish.”
Another hold from the Bank of Canada, and no indication of further cuts or hikes any time soon, could put some life back into the beleaguered housing market. Would-be buyers have been waiting on the sidelines to see if home prices and interest rates would fall further.
“For homebuyers and those approaching a mortgage renewal, stability matters,” Phil Soper, president and chief executive officer of Royal LePage, said in a statement.
“It provides greater certainty around financing costs and allows households to make housing decisions based on need and affordability, rather than trying to time interest rate moves.”