CA: Bank of Canada Announcement

Highlights

As widely expected, the Bank of Canada held its key policy rate unchanged at 2.25 percent, where it has been since it brought it down from 2.50 percent in October 2025. It added the current rate is appropriate as long as the economy continues to evolve in line with expectations. It noted heightened uncertainty while remaining prepared to respond to outlook changes.

In December, Governor Tiff Macklem had said that the central bank was prepared to respond if a new shock or an accumulation of evidence materially change the outlook. The materiality and shock language did not appear in today's policy statement or Macklem's opening statement. However, the governor said during the press conference that the central bank is indeed prepared to act in case of a shock or if the outlook changes materially.

Overall, The outlook for the global and Canadian economies is little changed relative to the projection in the October Monetary Policy Report (MPR). However, it remains vulnerable to"unpredictable" U.S. trade policies and"elevated" geopolitical risks.

During the press conference following the policy announcement, Macklem said the threat to the independance of the Fed contributes to the overall sense of uncertainty.

Overall,"the range of possible outcomes is wider than usual". Such incertitude"makes it difficult to predict the timing or direction of the next change in the policy rate."

While the central bank can help the economy get through its period of structural change,"Monetary policy cannot compensate for the structural damage caused by tariffs, and it cannot target hard-hit sectors of the economy."

Ahead of the Canada-U.S.-Mexico-Agreement (CUSMA) review set for July, President Donald Trump threatened 100 percent tariffs on all Canadian goods if Canada"makes a (free trade) deal with China". The comments were made after an internationally acclaimed speech by Prime Minister Mark Carney at Davos calling on middle powers to unite forces. Canada also concluded an agreement that would let China import a limited number of China-made EVs to Canada in exchange for China lowering tariffs on Canada's canola. Carney has said he has no intention to reach a free trade agreement with Beijing.

The BOC expects Canada GDP growth to slow to 1.1 percent in 2026 from 1.7 percent in 2025
On the inflation front, the BOC statement said that while inflation picked up to 2.4 percent in December, excluding the effect of changes in taxes, it has been slowing since September.

The central bank highlighted the"high" unemployment rate at 6.8 percent, with few businesses planning to hire in months ahead.

After a volatile beginning of the year that will see inflation at 2.4 percent in January, 1.8 percent in February and 1.7 percent in March, it will settle around 2 percent from April.

Commenting on the drivers of U.S. dollar depreciation over the past year, Macklem attributed it largely to trade and geopolitical events, rather than commodity prices or interest rate differential.

Market Consensus Before Announcement

Forecasters expect the bank to keep rates on hold at 2.25 percent as the BOC has done enough easing if things unfold as expected.

Definition

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.

Description

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.

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