Bank of Canada interest rate decisions

The Bank of Canada is the country’s central bank. It sets monetary policy with the goal of achieving low and stable inflation.

The bank controls short-term interest rates, and influences longer-term interest rates on things like mortgages, business loans and car loans. Higher interest rates slow down the economy and act as a brake on inflation. Lower interest rates stimulate the economy and tend to increase inflation. The bank’s aim is keeping the annual rate of inflation – the speed that consumer prices increase across the economy – at 2 per cent.

The bank has several other roles. It prints Canadian bank notes, acts as banker to the federal government, helps maintain financial stability and oversees the country’s retail payment system. It has recently been given the mandate to oversee Canada’s open banking and stablecoin regimes.

The bank is led by Governor Tiff Macklem, and monetary policy is set by a seven-person governing council.

The Bank of Canada’s benchmark interest rate, known as the policy rate, is at 2.25 per cent. It has held rates steady for the past two decisions.

Interest rates have been on a roller coaster in recent years. The bank cut the policy rate to 0.25 per cent at the start of the COVID-19 pandemic. When inflation surged after the end of lockdowns, the bank responded by raising interest rates 10 times in 2022 and 2023, bringing the policy rate to 5 per cent. The bank reversed course in the summer of 2024, and cut nine times over the next year and a half, taking the policy rate down to the current level.

At 2.25 per cent, the policy rate is at the lower end of what the bank considers to be its “neutral range” – a level of interest rates that neither stimulates nor restrains the economy.

The bank has indicated that it expects to remain on hold for some time, but isn’t ruling out the possibility of future rate moves if warranted. Bay Street analysts and financial markets expect the bank to remain on hold through 2026.

The bank has eight interest rate announcements a year. The next one is on March 18, 2026.

Inflation is measured by looking at the annual change in the Consumer Price Index, a Statistics Canada measure that captures price changes across the economy. Annual CPI inflation was 2.3 per cent in January, down from 2.4 per cent in December.

Inflation has largely normalized over the past few years. After hitting a 40-year high of 8.1 per cent in the summer of 2022, the pace of inflation declined quickly, and has been within the bank’s 1-per-cent to 3-per-cent control range over the past year.

Some concerns remain. Core inflation measures, which capture underlying price pressures, have been stuck close to 3 per cent for months – although they did trend lower in December. And there are pockets of higher inflation, including in categories that are important for cost-of-living concerns, such as food and rent.

Looking forward, however, the bank expects inflation to moderate in the coming months and settle close to 2 per cent through 2026. This assumes cost pressures owing to the trade war with the United States are offset by weak demand in the Canadian economy, which make it difficult for companies to pass along price increases.

The Bank of Canada is expected to keep interest rates steady through to 2026. But the trajectory of monetary policy will ultimately depend on how the Canadian economy fares in its trade war with the United States.

Canada has so far avoided a recession, which many economists predicted when U.S. President Donald Trump first put tariffs on his neighbour. However, the levies have had a major impact on the economy. Canadian exports are down around 4 per cent, companies have paused hiring and investment plans, and the unemployment rate was 6.8 per cent in December – with workers in tariff-hit industries and young people affected disproportionately.

The Bank of Canada’s latest forecast, published in its quarterly Monetary Policy Report in January, sees muted, but still positive, economic growth over the next two years – held back by trade uncertainty and slow population growth. It forecasts 1.1 per cent GDP growth in 2026 and 1.5 per cent in 2027.

This outlook depends heavily on U.S. trade policy. Most Canadian exports to the U.S. remain tariff-free, thanks to a carve-out for goods that comply with rules in the North American free-trade pact, the USMCA. If this exemption were to be removed, Bank of Canada modelling suggests the economy would fall into a deep recession. This makes the coming review of the USMCA, which is meant to conclude by July, a major risk.

Amid all the trade uncertainty, Governor Tiff Macklem is keeping his options open. “While Council judges the current policy rate is appropriate based on our outlook, the consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate,” he said after the last rate announcement in January.

Most Canadians experience interest rates through mortgages and various forms of consumer debt, including credit cards, personal loans and auto loans.

The central bank’s policy rate directly influences the “prime rate” offered by commercial banks, and changes to the policy rate immediately flow through to variable-rate mortgages. Fixed-rate mortgages are based on interest rates in bond markets. These are not directly controlled by the Bank of Canada, but market expectations about future central bank decisions feed into bond yields.

The level of interest rates affects the economy as a whole, particularly for interest-rate-sensitive sectors such as housing. Higher interest rates slow down the housing market and disincentivize business investment, which can have an impact on employment levels. Lower interest rates have the opposite effect.

Because the bank’s interest rate decisions affect the whole economy, it typically does not set monetary policy based on the needs of any one sector or region. Over the past year, the bank has said monetary policy is not particularly well suited to dealing with the trade war, which is a complicated shock that hits some sectors and regions harder than others, and which both increases prices while slowing economic growth.

“Monetary policy cannot compensate for the structural damage caused by tariffs, and it cannot target hard-hit sectors of the economy. But it can play a supporting role, helping the economy through this period of structural change, while maintaining inflation close to the 2 per cent target,” Mr. Macklem said in January.