Bank of Canada holds benchmark rate at 2.25%, signals extended pause

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 kept its policy rate at 2.25 per cent, following cuts in September and October. 

With the Canadian economy “proving resilient” in the face of U.S. tariffs, Bank of Canada Governor Tiff Macklem said that the policy rate was at “about the right level to keep inflation close to 2 per cent while helping the economy through this period of structural adjustment.”

He added that the bank could resume easing if an economic shock or accumulation of weak data “materially change the outlook.” 

Follow live updates on the Bank of Canada rate decision

Having lowered interest 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. After the decision, financial markets are betting the bank’s next move will be a quarter-point hike in the fall of 2026, according to Bloomberg data.

In effect, monetary policy appears to have returned to a steady glide path after several years of volatility, which saw the bank cut the policy rate to near zero at the start of the pandemic then raise it rapidly to 5 per cent in an attempt to contain the biggest burst of inflation in 40 years. 

Headline inflation has been running at around 2 per cent for the past year, although core measures of inflation have been stuck around 3 per cent.  

Mr. Macklem said the bank believes underlying inflation is running at around 2.5 per cent, although he did not sound particularly concerned about upward pressure on prices.  

“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,” he said, according to the prepared text of his press conference remarks. 

“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.”

Fed expected to cut rates, signal less certain outlook for 2026

The bank’s move back to the sidelines 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 being constrained by uncertainty. 

But overall, the 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. 

“We expect growth in final domestic demand to resume, but with an anticipated decline in net exports, GDP growth is likely to be weak in the fourth quarter before picking up in 2026,” Mr. Macklem said. 

The labour market remains weak, but appears to be 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. 

Mr. Macklem said that the economic outlook remains uncertain, especially given the review of the United States-Mexico-Canada free trade agreement next year, which could create more trade friction. And he reiterated his view that U.S. protectionism “means our economy works less efficiently, with higher costs and less income.”

At 2.25 per cent, the policy rate is at the lower end of what the central bank considers to be a “neutral range” for interest rates, which neither stimulates nor constrains economic activity. 

“We agreed that a policy rate at the lower end of the neutral range was appropriate to provide some support for the economy as it works through this structural transition while keeping inflationary pressures contained,” Mr. Macklem said. 

Mr. Macklem and Senior Deputy Governor Carolyn Rogers will hold a press conference at 10:30 am ET.