The Bank of Canada held its key interest rate at 2.25 per cent on Wednesday—a prudent pause after consecutive cuts as the country’s labour market remains soft and unemployment remains elevated.
It’s clear that the Canadian economy is proceeding through a difficult structural adjustment amid a changing global economic landscape. However, the economy did expand at a greater pace than previously thought; recent upward revisions to growth data imply far less slack across the economy, which likely explains why inflation remains sticky.
Given the recent improvement in Canadian economic data, holding steady was the best option for the central bank at this time as inflation moves back toward 2 per cent.
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Today’s decision suggests policymakers at the Bank of Canada feel a bit more upbeat on the direction of the economy heading into 2026—but the central bank still finds itself in a difficult position that won’t get any easier next year.
In addition to contending with a sluggish job market and an elevated unemployment rate, the outcome of free-trade renegotiations between Canada, the U.S. and Mexico will factor into any future decisions from the Bank of Canada. These critical challenges lay outside of the purview of the central bank.
Canada’s exposure to a global sector that is currently adjusting to U.S. attempts to rebalance global trade in its favour implies higher prices and inflation. This will continue to push the Bank of Canada to focus on price stability as a precondition of maximum sustainable employment.
From our perspective, the primary risk to Canada’s long-term economic outlook is that the U.S. may not support the continuation of CUSMA—which would result in another shock to the economy.
In our estimation, the challenges in the labour market are best addressed through the fiscal channel and not by monetary policy. The risks around the inflation outlook through trade negotiations—given the post-pandemic regime change in inflation and interest rates—are going to be a source of restraint at the Bank of Canada in the coming years.
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