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Bank of Canada Maintains 2.25 Per Cent Rate Facing Global Instability

Canadian Economics

By: Walter Bolduc

    

The central bank kept the policy interest rate at 2.25 per cent. The Bank Rate stands at 2.5 per cent, and the deposit rate remains at 2.20 per cent.

  • While the global economy shows resilience, significant uncertainty persists, primarily driven by geopolitical tensions and rising trade protectionism in the United States.
  • Growth in the U.S. remains bolstered by robust consumer spending and investments in artificial intelligence, though new tariffs are generating upward pressure on inflation.
  • The Euro area saw growth surpass forecasts, largely due to the services sector, whereas China continues to grapple with sluggish domestic demand and a struggling housing market.
  • Canada’s economy expanded by 2.6 per cent in the third quarter. However, this growth was largely fuelled by volatile trade numbers, as final domestic demand showed no growth.
  • Looking ahead, the Bank anticipates a weaker GDP performance in the fourth quarter due to a drop in net exports, with a growth rebound expected in 2026.
  • Conditions in the labour market have shown modest improvement, with employment rising over the last three months and the unemployment rate dipping to 6.5 per cent in November.
  • Consumer Price Index (CPI) inflation decelerated to 2.2 per cent in October, aided by lower gasoline prices and a moderation in food price increases.
  • The Bank cautions that near-term CPI readings will be temporarily elevated due to base-year effects resulting from the GST/HST holiday implemented last year.
  • Core inflation measures continue to range between 2.5 and 3 per cent, with the Bank’s assessment of underlying inflation sitting at 2.5 per cent.
  • The Bank projects inflation will remain close to the 2 per cent target, as economic slack helps counterbalance cost pressures arising from shifting trade patterns.
  • The Governing Council views the current policy rate as suitable but stands prepared to adjust course should economic conditions evolve.

Key Insights

Headline Q3 growth obscures economic fragility. While Canada’s 2.6 per cent GDP growth in Q3 exceeded market expectations, the Bank identifies trade volatility—rather than strong domestic demand—as the primary driver. Final domestic demand remained stagnant, and hiring intentions are low. This cautious view is supported by the Conference Board of Canada’s recent Canadian Outlook, which notes that despite the headline GDP increase, business investment remains weak. This indicates that economic momentum is tenuous as we approach 2026.

Proximity to inflation target offers policy flexibility. With headline CPI slowing to 2.2 per cent in October, the Bank has more maneuvering room, even as core measures remain stickier at 2.5 to 3 per cent. The Bank forecasts inflation will stay near the 2 per cent target as economic slack neutralizes other cost pressures. Data from Statistics Canada supports this trend, showing decelerating food inflation and a significant drop in gas prices. This backdrop permits the Bank to hold rates steady without risking price stability.

Labour market rebound remains inconsistent. Although recent months have seen job gains and a decrease in the unemployment rate to 6.5 per cent, recovery is not uniform; sectors sensitive to trade continue to struggle. Wage growth has cooled and hiring plans remain modest. As highlighted in the Conference Board of Canada’s Labour Market Recovery in Motion report, ongoing structural trade adjustments are expected to continue weighing on job creation. This patchy recovery supports the Bank’s prudent approach to future rate decisions.

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