Bank of Canada Holds Rates; Warns on Trade, Geopolitical Risks

The Bank of Canada held its key overnight lending rate unchanged at 2.25% on Wednesday, maintaining borrowing costs for the second consecutive time as it warned on “unpredictable U.S. trade policies and geopolitical risks.” 

While the Bank said the overall outlook for the Canadian economy is little changed from its October Monetary Policy Report, it emphasized that uncertainty remains elevated, particularly around US trade policy and the upcoming review of the Canada–United States–Mexico Agreement (CUSMA). 

Meanwhile, after posting strong growth in the third quarter of last year, Canada’s economy appears to have lost momentum late in 2025. The Bank said GDP growth in the fourth quarter likely stalled, with exports continuing to face headwinds from US tariffs. At the same time, domestic demand is showing early signs of improvement, the Bank said. 

Employment has risen in recent months, but labour market conditions remain soft. The national unemployment rate sits at an elevated 6.8%, and relatively few businesses report plans to increase hiring, the Bank added 

Looking ahead, the Bank said it expects economic growth to remain modest as population growth slows and Canada adapts to a more protectionist US trade environment. Real GDP is projected to rise 1.1% in 2026 and 1.5% in 2027, broadly in line with earlier forecasts.  

Inflation pressures have continued to ease. Consumer price inflation rose to 2.4% in December, largely due to base-year effects related to last winter’s temporary GST and HST holiday. Excluding tax changes, inflation has been slowing since September. The Bank’s preferred core inflation measures have eased to around 2.5%, down from 3% in October. Inflation averaged 2.1% in 2025 and is expected to remain close to the Bank’s 2% target over the forecast period. 

The central bank said monetary policy remains focused on maintaining price stability while supporting the economy through a period of structural adjustment. The current policy rate remains “appropriate,” the Bank said but stressed it is prepared to respond should the outlook change.