As widely expected, the Bank of Canada held its key policy rate unchanged at 2.25 percent Wednesday, with the statement indicating the bar for another rate cut is high given the current policy rate at about the right level should inflation and economic activity evolve as projected.

In his opening statement to the press conference, Governor Tiff Macklem said the Canadian economy remained"resilient" despite"steep U.S. tariffs" that are impacting steel, aluminum, autos and lumber sectors.

In fact, the most recent data had fueled anticipations that the next move, when it happens, would be a rate hike: third quarter GDP growth expanded at an annualized pace of 2.6 percent, far exceeding the central bank's projection, although household consumption contracted 0.4 percent. The economy also added more jobs than expected in November, bringing down the unemployment rate to 6.5 percent, although all jobs were part-time.

The Bank's interpretation of these reports is particularly important to assess where it puts weight in the data given the strong headline numbers. Its reading indicates that uncertainty remains high enough to not bring a rate hike to the picture at the moment, especially considering"inflationary pressures continue to be contained". It is worth keeping in mind that the Canada-United States-Mexico Agreement (CUSMA) is coming up for renegotiations in 2026."Uncertainty remains high and the range of possible outcomes is wider than usual. If the outlook changes, we are prepared to respond," Macklem said. And for now, the economic outlook remains the same, he confirmed.

The BoC attributed the strong GDP headline number to volatility in trade and still expects growth to be weak in the fourth quarter. Beyond 2025, Growth is forecast to pick up in 2026, although uncertainty remains high and large swings in trade may continue to cause quarterly volatility.

The BoC also acknowledged the labor market improvement but tempered the strength of the November headline numbers by stressing the ongoing weakness in trade-intensive sectors and subdued hiring intentions.

On the inflation front, the BoC continues to assess that underlying inflation pressures remain around 2.5 percent. It warned that CPI readings will increase in the near term due to last year's GST/HST tax holiday. Looking through this choppiness, the Bank expects ongoing economic slack to roughly offset cost pressures associated with the reconfiguration of trade, keeping CPI inflation close to the 2% target, it said.

Overall, the BoC's statement points more to a long pause than a rate hike, but definitely confirms that bar is high to bring the policy rate below 2.25 percent.

No one expects another rate cut as the BOC said after its September cut that rates are now where they need to be. Surprisingly strong employment data have bolstered the case for no cut.

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.