Bank of Canada Holds Rates
Citing Global Trade Uncertainty
The Bank of Canada has announced it will maintain the current monetary policy stance, balancing the need for price stability with the headwinds of US protectionism and slowing population growth. Below are the key facts regarding the interest rate decision, the economic outlook, and inflation trends.
Interest Rate Decision
The Bank of Canada has held its target for the overnight rate at 2.25%, with the Bank Rate set at 2.5% and the deposit rate at 2.20%. The Governing Council determined that this policy rate remains appropriate, provided that the economy evolves roughly in line with their current projections. However, the Bank remains ready to adjust its policy should the economic outlook shift.
Canadian Economic Outlook: Growth and Employment
The domestic economy faces a period of structural adjustment, particularly regarding trade relations with the United States.
GDP Growth: Following a strong third quarter, GDP growth likely stalled in the fourth quarter. Looking forward, the Bank projects modest growth of 1.1% in 2026 and 1.5% in 2027, projections that are largely consistent with the October report.
Impact of Protectionism: US trade restrictions and broader uncertainty are disrupting Canadian growth, particularly by buffeting exports. The economy is currently adjusting to US protectionism, and the upcoming review of the Canada-US-Mexico Agreement remains a significant source of uncertainty.
Domestic Demand: Despite export challenges, domestic demand appears to be recovering, supported by consumer spending and a gradual strengthening of business investment.
Labor Market: While employment has risen recently, the unemployment rate remains elevated at 6.8%, and relatively few businesses indicate plans to increase hiring.
Inflation Trends
The Bank remains focused on keeping inflation near its target while navigating trade-related cost pressures.
Current Status: CPI inflation rose to 2.4% in December, largely due to base-year effects associated with the previous winter’s GST/HST holiday.
Core Inflation: Excluding tax changes, inflation has been slowing since September, with the Bank’s preferred measures of core inflation easing from 3% in October to approximately 2½% in December.
Projection: Inflation averaged 2.1% in 2025, and the Bank expects it to remain close to the 2% target throughout the projection period, as trade-related price pressures are balanced by excess supply in the economy.
Global Economic Context
The global backdrop remains relatively stable but is characterized by divergence among major economies.
Global Growth: The Bank expects global growth to average approximately 3%, with financial conditions remaining generally accommodative.
United States: The US economy is outpacing expectations, driven by consumer spending and AI-related investment. However, tariffs are currently pushing up US inflation, though this effect is expected to fade later in the year.
Currency and Commodities: Weakness in the US dollar has pushed the Canadian dollar above 72 cents. Meanwhile, oil prices have fluctuated due to geopolitical events and are assumed to be slightly lower than the previous October estimates.
Other Regions: Growth in the euro area is being supported by the service sector and fiscal policy, while China’s GDP growth is expected to slow gradually as weak domestic demand counteracts strong exports.
Looking Ahead
The Bank of Canada emphasizes that the outlook is vulnerable to unpredictable geopolitical risks and US trade policies. Monetary policy is currently focused on helping the Canadian economy through this “period of structural adjustment” while maintaining confidence in price stability.
Official PR: https://www.bankofcanada.ca/2026/01/fad-press-release-2026-01-28/