OTTAWA — The Bank of Canada held its benchmark interest rate at 2.25 percent on Wednesday, warning that monetary policy cannot offset the structural harm caused by U.S. tariffs as the economy adjusts to a shifting trade environment.
The decision marks the second consecutive hold. The Bank Rate remains at 2.5 percent and the deposit rate at 2.20 percent.
Governor Tiff Macklem said uncertainty around the central bank's forecast is "heightened" and the range of possible outcomes is "wider than usual."
"Monetary policy cannot compensate for the structural damage caused by tariffs, and it can't target hard-hit sectors of the economy," Macklem said. "But it can play a supporting role, helping the economy through this period of structural adjustment while maintaining inflation."
The central bank can't predict its next move
Macklem said elevated uncertainty makes it "difficult to predict the timing or direction of the next change in the policy rate."
The Bank projects GDP growth of 1.1 percent in 2026 and 1.5 percent in 2027. After a strong third quarter, growth likely stalled in the fourth quarter as exports faced tariff pressures.
CPI inflation stood at 2.4 percent in December, close to the Bank's 2 percent target. Core inflation eased from 3 percent in October to around 2.5 percent in December.
The unemployment rate remains elevated at 6.8 percent, and few businesses plan to hire more workers in the coming months.
Macklem warns of unusual potential for a new shock
In an interview with Reuters, Macklem said he sees "unusual potential for a new shock" to the economy, given elevated geopolitical risks and U.S. trade policy.
He cited U.S. President Donald Trump's threats toward Greenland, his removal of Venezuela's leader, and repeated threats to impose more tariffs on Canada.
"There is unusual potential for a new shock, a new disruption," Macklem said. "Geopolitical risks are elevated."
Macklem said the Bank's economic forecasts are "more vulnerable" than usual to being wrong.
CUSMA review looms asa major risk
The upcoming review of the Canada-United States-Mexico Agreement poses a significant risk to the outlook, the Bank said.
The central bank's projections assume tariffs currently in place remain in place, and CUSMA exemptions for other goods continue. That could change when the trade pact comes up for review later this year.
"If the outlook changes, we are prepared to respond," Macklem said.
Economists see rates on hold, lean toward a cut if needed
TD economist Andrew Hencic noted the "emphasis on uncertainty in the statement was prominent."
BMO chief economist Douglas Porter said there was a "subtle shift" in the Bank's language on inflation, now describing it as "close to the two per cent target" rather than "around 2.5 per cent."
Desjardins economist Royce Mendes said the Bank sounded "less concerned today about upside risks to inflation and more concerned about downside risks to growth."
Most economists expect the Bank to remain on hold until the CUSMA negotiations are clarified. Porter said a future cut appears more likely than a hike if conditions shift.
Borrowers see no immediate relief
With no change to the benchmark rate, commercial lenders are expected to keep borrowing costs unchanged. Canadians with variable-rate mortgages and loans will continue paying the same rates.
"For Canadian households, holding rates steady doesn't fix the problem, it freezes it," said Stacy Yanchuk Oleksy, a debt expert at Money Mentors. "Costs are still high, income growth is uneven, and there's no clear moment where things start to feel easier."
