After cutting interest rates nine times since the summer of 2024, the Bank of Canada held its policy rate steady at 2.25 per cent in December and signalled that further moves in either direction are unlikely any time soon.Keito Newman/The Globe and Mail
The Bank of Canada is expected to leave interest rates unchanged on Wednesday, settling into what financial markets are betting will be an extended hold period amid ongoing uncertainty about the future of North American trade.
The U.S. Federal Reserve is also expected to stand pat on Wednesday, although it’s wrestling with different issues, including U.S. President Donald Trump’s attempts to undermine the central bank’s independence and questions about who will replace Jerome Powell as chair when his term ends in May.
The Bank of Canada hit cruise control last month. After cutting interest rates nine times since the summer of 2024, Governor Tiff Macklem and his team held the bank’s policy rate steady at 2.25 per cent in December and signalled that further moves in either direction are unlikely any time soon.
Economic growth in Canada is muted, unemployment is elevated and businesses remain wary of hiring and investing, given the uncertainty around the future of the North American free-trade pact, the USMCA, which is scheduled for a review in July. Still, the country has so far avoided the recession many economists were predicting this time last year.
Likewise, inflation continues to run slightly hot, with annual consumer price index inflation ticking up to 2.4 per cent in December. But that’s well within the bank’s control range, and core inflation measures that capture underlying price trends moved lower last month.
“The economy is hanging in there. I guess the question is how long that can persist for,” said Benjamin Reitzes, managing director of Canadian rates at the Bank of Montreal.
“We’ll see what happens with trade and trade negotiations. That’s the one thing that they have no control over. And they are, like the rest of us, at the mercy of how these negotiations go,” he said, referring to the central bank.
Canada-U.S. relations appeared to take another turn for the worse over the weekend, with Mr. Trump threatening to impose 100 per cent tariffs on Canadian goods if Ottawa pursues deeper trade ties with China. This followed Prime Minister Mark Carney’s agreement with Beijing to lower tariffs on Chinese electric vehicles in return for lower tariffs on Canadian agricultural products.
The latest threat highlights Canada’s precarious economic position. But it’s unlikely to affect monetary policy in the near term, given that Mr. Trump has made threats before and not followed through and Mr. Macklem has tended to look past the noise coming from Washington.
“We can’t overreact to the latest piece of news,” Mr. Macklem said in an interview with The Globe and Mail in December.
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Financial markets see the central bank remaining on hold through 2026, with some chance of a quarter-point hike in December, according to Bloomberg data.
The Fed is facing a different set of challenges. The U.S. central bank delivered its third consecutive quarter-point cut in December, bringing the target range for the federal funds rate down to 3.5 to 3.75 per cent. (The Fed targets a range, not a single point.)
Following the decision, Mr. Powell said that the central bank was now “well positioned to wait and see how the economy evolves from here,” suggesting the Fed was moving back to the sidelines. Since then, stronger-than-expected U.S. GDP and employment data has reinforced the case for a hold.
This is unlikely to sit well with Mr. Trump, who has harangued the Fed for months to lower interest rates further, and taken multiple steps to undercut the central bank’s ability to operate independently.
The President has tried to fire Lisa Cook, a member of the Fed’s interest-rate setting committee – although Supreme Court judges that heard the case last week sounded skeptical of the administration’s argument.
And earlier this month, Mr. Powell revealed that the U.S. Department of Justice had opened a criminal investigation into his handling of Fed building renovations and his testimony to Congress.
Mr. Powell dismissed the accusations as pretexts. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” he said in an extraordinary video released on the Fed’s website.
The Fed’s job is much harder than the Bank of Canada’s right now, said Claire Fan, senior economist at Royal Bank of Canada. Alongside the political interference, the Fed is also dealing with a highly uncertain economic policy landscape that could impact inflation.
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“There’s still an imminent decision to be made by the Supreme Court as to whether the IEEPA tariffs are actually legal or not,” Ms. Fan said, referring to the International Emergency Economic Powers Act, one of the laws Mr. Trump has used to impose tariffs.
“And there are a lot of questions surrounding whether [companies are] going to be refunded – which leads to an impact on business pricing decisions. Because arguably if you’re a company and you’re expecting a lot of what you paid to be refunded, then that softens your incentive to raise consumer prices to make up for that profit loss."
Financial markets are betting the Fed will remain on hold for the next three decisions, before cutting again in June. By then, Mr. Trump will have appointed a new and presumably more dovish chair, willing to push for his vision of lower interest rates.
With little expected in the way of monetary policy changes this week, observers will be watching for clues about how central bankers see the economy shaping up in the coming quarters. The Bank of Canada will publish a new quarterly Monetary Policy Report on Wednesday, which will contain updated economic growth and inflation forecasts.
Bill Robson, chief executive of the C.D. Howe Institute and chair of the organization’s monetary policy committee, said the Bank of Canada is in a good position to wait and see how inflation, employment, consumer spending and business confidence develop.
“The economy is not in a bad place right now with inflation a bit above target, but certainly the balance of evidence is that it’s cooling off. And they’ve got credibility, so they do have room to maneuver,” he said.
“I’d rather be Tiff than Jerome Powell, that’s for sure.”