The Bank of Canada maintains its interest rate policy to start 2026

  • First National Financial LP

The Bank of Canada is ushering in the new year by keeping its benchmark interest rate at 2.25%. Prior to this announcement, some market commentators were unsure of where the Bank would land with this decision, due to mixed economic signals. Now we know. The Bank’s rationale is summarized below.

Canadian Economic Performance and Employment

  • Growth in Canada continues to be disrupted by US trade restrictions and uncertainty
  • After a strong third quarter, Canadian GDP growth in the fourth quarter “likely stalled”
  • Exports continue to be buffeted by US tariffs; domestic demand appears to be picking up
  • Employment has risen in recent months, although the unemployment rate remains elevated at 6.8% and relatively few businesses say they plan to hire more workers

Oil prices and the C$

  • Recent weakness in the US dollar has pushed the Canadian dollar above 72 cents US, roughly where it had been since the Bank’s Monetary Policy Report in October
  • Oil prices have been fluctuating in response to geopolitical events and, going forward, are assumed to be slightly below the levels in the October report

 Canadian Inflation and Outlook

  • Inflation, measured by the Consumer Price Index (CPI), picked up in December to 2.4%, boosted by base-year effects linked to last winter’s GST/HST holiday
  • Excluding the effect of changes in taxes, inflation has been slowing since September
  • The Bank’s preferred measures of core inflation have eased from 3% in October to around 2.5% in December
  • For 2025 as a whole, inflation was 2.1%
  • The Bank expects inflation to stay close to its 2% target over the projection period, with trade-related cost pressures offset by excess supply

Global Economic Performance and Outlook

  • Economic growth in the United States continues to outpace expectations and is projected to remain solid, driven by AI-related investment and consumer spending
  • Tariffs are pushing up US inflation, although their effect is expected to “fade gradually” later this year
  • In the euro area, growth has been supported by activity in service sectors and will get additional support from fiscal policy
  • China’s GDP growth is expected to slow gradually, as weakening domestic demand offsets strength in exports
  • The Bank expects global growth to average about 3% over the projection horizon

Outlook for Canada

The BoC forecasts that economic growth will be “modest in the near term” as population growth slows and Canada adjusts to US protectionism. In its projection, the Bank suggests that consumer spending will hold up and business investment will strengthen gradually, with fiscal policy providing some support.

The Bank projects growth of 1.1% in 2026 and 1.5% in 2027, broadly in line with its October projection.

A key source of uncertainty, according to the Bank, is the upcoming review of the Canada-US-Mexico Agreement.

Overall, the Bank says its outlook for the global and Canadian economies is “little changed” relative to the projection in the October Monetary Policy Report and that global financial conditions have remained accommodative overall. However, this outlook “is vulnerable” to unpredictable US trade policies and geopolitical risks.

Final comments

The Bank indicated that its monetary policy is focused on keeping inflation close to the BoC’s 2% target while helping the economy through this period of “structural adjustment.”

Governing Council believes the current policy interest rate “remains appropriate, conditional on the economy evolving broadly in line” with the outlook it published today. However, uncertainty is heightened and the Bank is monitoring risks closely.

The Bank added that if the outlook changes, it is “prepared to respond.”

Overall, the Bank reinforced that it is committed to ensuring that Canadians continue to have confidence in price stability “through this period of global upheaval.”

Next up

The Bank is scheduled to make its next policy interest rate announcement on March 18th. First National’s executive summary will follow. In the meantime, please visit the Resources page of this website for other important insights.

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