The Bank of Canada held its benchmark lending rate unchanged at 2.25 per cent in the final monetary policy update for 2025.
Most economists expected the central bank to announce a hold to interest rates, after recent reports on the economy were somewhat positive.
This included recent gauges on economic output, or gross domestic product; consumer inflation, or the consumer price index; and the Labour Turnover survey showing unemployment ticking down for the second straight month.
Several economists think that if the bank makes any changes in the near future, it won’t be a cut, but actually a hike in the second half of 2026.
“No change is priced until markets begin to seriously toy with a hike by summer into fall,” said Derek Holt, vice-president and head of capital markets economics at Bank of Nova Scotia, in a statement.
“A great deal of uncertainty lies ahead into 2026, which cuts in both directions to our (Bank of Nova Scotia’s) expectations.”
One of the reasons a hike may be more likely, according to senior economist Claire Fan at Royal Bank of Canada, is that there’s still a risk inflation could tick higher because of the trade war and tariffs.
“Canadian producers are not directly paying tariffs, but still face cost increases for managing trade complications, investing in alternative sources or partners, and absorbing higher prices from U.S. counterparts through integrated supply chains,” said Fan in a statement.
“We (Royal Bank of Canada) see risks mostly tilted towards more inflationary pressures, not less. If either of those risks were to materialize more tangibly, risks of Bank of Canada rate hikes as early as the second half of 2026 rise.”
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Governing members at the Bank of Canada have opted to cut interest rates four times this year, including at the September and October meetings. That was after holding rates for three straight meetings in April, June and July, and cutting rates in January and March.
Following the October rate cut, Bank of Canada governor Tiff Macklem said that at 2.25 per cent, the current rate is “at about the right level.”
Monetary policy is updated eight times per year based on the Bank of Canada’s mandate to “promote the economic and financial welfare of Canada.”
Keeping rates unchanged at a monetary policy meeting suggests borrowing costs in Canada are right around where they should be, given the current state of the economy.
“A rate hold is the only move that makes sense in response to recent opposing economic forces,” said Shannon Terrell, a financial expert at NerdWallet Canada.
“There’s no reason to do anything with the overnight rate other than to leave well enough alone. ”
In a statement after Wednesday’s announcement, the Bank of Canada said once again that the rate is “at about the right level,” but the uncertain outlook means they remain cautious into 2026.
“Governing Council sees the current policy rate at about the right level to keep inflation close to two per cent, while helping the economy through this period of structural adjustment,” said the Bank of Canada in a statement.
“Uncertainty remains elevated. If the outlook changes, we are prepared to respond. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”
The Bank's view on affordability in Canada
Macklem spoke in a press conference shortly after Wednesday’s rate announcement, and answered questions from reporters on the rising cost of living in Canada.
Specifically, Macklem was asked why consumers weren’t feeling much price relief for goods and services if the economy appears to be more in balance.
He explained that inflation has been hovering around two per cent for more than a year now, suggesting it’s good news that price growth has been relatively stable.
Macklem said the issue for consumers is that “inflation has come down (since the pandemic), but prices have not.”
He also stressed that efforts to force lower the cost of goods and services in Canada would backfire and risk a “severe recession.”
“It underscores the importance of keeping inflation low so that incomes can catch up. If we were to try and push the whole price level down, that would cause a severe recession in Canada — nobody wants that,” said Macklem speaking to reporters in Ottawa on Wednesday.”
“We need to improve our productivity, we need to invest more, we need to diversify our trade. That’s what’s going to grow our income, and with more income, then everything becomes more affordable.”
A report from the Bank of Canada in November explains how the best way to increase incomes for Canadian workers is to first accelerate economic productivity.
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