Banque du Canada Holds Interest Rate at 2.25%

The Bank of Canada on Wednesday kept its benchmark interest rate unchanged at 2.25%, a widely expected decision, as policymakers pointed to elevated uncertainty clouding the economic outlook, particularly surrounding U.S. trade policy and tariffs.

Speaking after the rate announcement, Bank of Canada Governor Tiff Macklem said the current interest rate remains appropriate under existing forecasts, but stressed that uncertainty is making it difficult to anticipate the timing or direction of future policy moves.

“While the Governing Council judges that the current policy rate is appropriate based on our outlook, there was a clear consensus that the unusually high level of uncertainty makes it hard to predict when or how the next change in interest rates will occur,” Macklem said.

The decision marks the second consecutive meeting in which the central bank has opted to remain on hold.

In its quarterly Monetary Policy Report, the Bank of Canada maintained its projection of moderate economic growth through 2026 and 2027, while reiterating that inflation is expected to hover around its 2% target.

The central bank raised its 2025 growth forecast to 1.7%, up from 1.2% projected in October, citing resilience in domestic demand despite trade headwinds. Growth expectations for 2026 remained unchanged at 1.1%, while the 2027 forecast was revised slightly lower to 1.5%, from 1.6%.

The bank noted that Canadian businesses will need time to adjust to the impact of U.S. tariffs, adding that hiring intentions remain weak, reflecting continued caution in the private sector.

Economists and financial markets remain divided over the future direction of monetary policy this year.

Many analysts expect another rate cut to support the economy as it absorbs the effects of tariffs imposed by U.S. President Donald Trump, particularly on key sectors such as steel, automobiles, and aluminum. Financial markets, however, are not pricing in a rate cut before 2026, with some expectations leaning toward a potential rate hike in the final quarter of this year.

Macklem warned that geopolitical risks remain elevated, highlighting the upcoming review of the Canada–United States–Mexico Agreement (CUSMA) as a major downside risk to the outlook.

“Geopolitical risks are high, and the upcoming review of the Canada–U.S.–Mexico trade agreement represents a significant uncertainty for the economy,” he said.

Market expectations showed little change following the rate decision. The Canadian dollar strengthened, rising 0.28% to 1.3535 per U.S. dollar, equivalent to 73.88 U.S. cents.

Despite tariff pressures, the Canadian economy has performed relatively well, supported by earlier rate cuts and improving household incomes.

The central bank expects consumer spending to continue growing modestly, while business investment is projected to see slight improvement. Macklem also expressed cautious optimism that economic restructuring driven by tariffs could eventually support a recovery in productive capacity. “But all of this will take time,” he concluded.