The Bank of Canada (BoC) opted to maintain its benchmark interest rate at 2.25 percent during its latest meeting, a decision that met widespread expectations in the financial community. Data from LSEG indicated a robust 93.5 percent probability that the central bank would choose to hold rates steady.
Governor Tiff Macklem stated that the BoC’s Governing Council believes the current policy rate is “about the right level” to sustain inflation near the target of two percent while also guiding the economy through a challenging phase of structural adjustments. This phraseology echoed sentiments expressed in the bank’s October announcement, signaling a consensus among economists that the cycle of rate cuts may be drawing to a close. However, opinions varied on the trajectory of future rates, with some analysts still entertaining the idea of hikes, while others predicted held rates or further cuts in the near term.
During the press conference, both Macklem and Senior Deputy Governor Carolyn Rogers acknowledged the ongoing financial pressures facing Canadians, noting that a significant portion of the population is still grappling with higher prices compared to previous years. Rogers emphasized the “overwhelming feeling of uneasiness or uncertainty” that currently pervades the Canadian public, largely spurred by tensions such as the trade war with the United States.
Despite recent economic indicators that showed more robust growth than anticipated—most notably a surprising 2.6 percent annualized growth in third-quarter GDP—Macklem urged caution. He referred to the domestic demand as flat and suggested that the quarter’s growth was primarily influenced by trade volatility. Expectations for weak performance in the fourth quarter were also highlighted.
The governor acknowledged improving employment statistics but cautioned against over-optimism, describing hiring intentions across various sectors as “muted.” This sentiment underscores the challenges posed by ongoing structural adjustments within the economy, which could take a significant amount of time to resolve.
As for inflation, Macklem predicted some volatility in the upcoming months, emphasizing that the absence of a GST/HST holiday would contribute to price fluctuations compared to the previous year. He remarked that ongoing economic slack is expected to balance out pressure stemming from trade reconfigurations, keeping consumer price index (CPI) inflation roughly around the two percent target.
Following the BoC’s decision, different economists expressed contrasting views on the future of interest rates. While some, like RBC economist Claire Fan, suggested that current economic conditions might ultimately warrant a rate hike—though likely not until 2027—others, such as CIBC’s Katherine Judge, believed that the central bank would remain on hold, depending heavily on incoming data trends.
National Bank of Canada conservative estimates now forecast that rate increases could begin in late 2026, particularly if employment trends continue to improve. Conversely, others, including Mackenzie Investments’ chief strategist, suggested the possibility of rate cuts as early as mid-2026 due to lingering economic uncertainties and potential pressures from the USMCA renegotiation.
As the discussion around the interest rate hold unfolds, attention is poised to shift towards January’s Monetary Policy Report, which will provide a formal opportunity for the BoC to recalibrate its forecasts in light of the newly revised GDP figures and employment surprises seen recently.
While market reactions to rate decisions traditionally lean towards flat responses in Canada, indications suggest that current economic assessments and policy directions might stir both positive and negative sentiments among investors and consumers alike.
Looking at the housing market, experts pointed out that although borrowing costs have stabilized and mortgage rates are no longer the primary concern for buyers, apprehensions about long-term investments remain prevalent. According to Joel Fox from Ownright, buyer caution stems less from interest rates and more from fears regarding potential overvaluation and equity losses.
Interestingly, the business outlook among small businesses remains cautious. Many report saddening consumer demand, which could be exacerbated by the current rate hold, leaving proprietors anxious about their performance through slower post-holiday months.
Overall, the BoC’s decision has kept the door open for a multitude of economic possibilities and speculations. As the situation evolves, stakeholders will closely monitor measurements of economic resilience that may inform future policy.
