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Bank of Canada Steadies Rate at 2.25 Per Cent

Canadian Economics

By: Walter Bolduc

    

The Bank of Canada held the target for the overnight rate at 2.25 per cent, with the Bank Rate at 2.50 per cent and the deposit rate at 2.20 per cent.

  • The decision was released alongside the January 2026 Monetary Policy Report, which projects modest growth as Canada continues adjusting to trade reconfiguration.
  • The Banks projects real GDP growth of 1.1 per cent in 2026 and 1.5 per cent in 2027, following trade‑driven volatility in the second half of 2025.
  • CPI inflation measured 2.4 per cent year‑over‑year in December, lifted by the GST/HST base‑year effect stemming from the temporary exemption in late 2024.
  • Excluding gasoline, CPI inflation was 3.0 per cent, with underlying inflation continuing to moderate.
  • Core inflation (trim and median) has eased toward 2.5 per cent, consistent with slowing underlying price pressures.
  • Employment was essentially flat in December, increasing by only 8,200, and the unemployment rate rose to 6.8 per cent as more Canadians searched for work.
  • Wage growth eased to 3.4 per cent year‑over‑year, reinforcing signs of labour‑market slack.
  • Global growth remains near 3 per cent. In the United States, growth is underpinned by strong consumer spending and a surge in AI‑related investment, but tariff pass‑through is adding to inflation and policy uncertainty is restraining some capex
  • Meanwhile in China, weak domestic demand and ongoing housing market stress are weighing on growth, with lower U.S.‑bound exports only partially offset by re‑routing to other markets.
  • Canadian economic volatility continues to be driven by swings in exports and inventories rather than broad‑based domestic strength.
  • The Bank expects inflation to remain close to 2 per cent, with economic slack offsetting trade‑related cost pressures.
  • Governing Council views the current rate as appropriate but remains ready to respond if economic or inflation conditions shift. 

Key Insights

Base-year effect distorts December CPI. December’s 2.4 per cent CPI was inflated by last year’s GST/HST holiday falling out of the base a temporary distortion that raises year‑over‑year measures despite softer underlying momentum. Core inflation has gradually eased toward 2½ per cent in recent months, giving the Bank confidence to hold.

Growth has slowed but is stabilizing as trade adjustments continue. The Bank’s 2026–27 growth path reflects ongoing supply‑chain reconfiguration, tariff‑related disruptions, and slower population growth. Excess supply is expected to persist into 2027, but gradually narrow as firms complete trade adjustments and reallocate capital. The CUSMA review adds a major layer of uncertainty to trade as the agreement enters its 2026 renewal window. The Bank notes that outcomes range from a straightforward 16‑year extension to significant renegotiation or even withdrawal, each carrying vastly different economic implications.

Soft economic conditions creates policy breathing room. Although we cautiously expect more stability compared to last year, our 2026 outlook remains subdued. Persistent trade policy uncertainty and a modest decline in Canada’s population will restrain consumer spending and help slow business cost growth by easing wage pressures. These factors will support a return to 2 per cent inflation this year. As a result, the Bank is expected to remain patient, holding off additional rate cuts in the near-term allowing slack to continue working through the economy.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit our Canadian Outlook.

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