The Bank of Canada announced today that it is keeping its benchmark interest rate at 2.25%. This hold-the-line approach reflects the Bank’s expert interpretation of macroeconomic data.

We summarize the Bank’s observations and its outlook below.

Canadian Economic Performance and Near-Term Outlook

• The Canadian economy grew by a “surprisingly” strong 2.6% in the third quarter, even as final domestic demand was flat
• The BoC notes that the increase in GDP largely reflected volatility in trade
• The Bank expects final domestic demand will grow in the fourth quarter, but with an anticipated decline in net exports, GDP will likely be “weak”
• Growth is forecast to pick up in 2026, although uncertainty remains high and large swings in trade may continue to cause quarterly volatility

Canadian Labor Market

• Canada’s labour market is showing “some signs” of improvement
• Employment has shown solid gains in the past three months and the unemployment rate declined to 6.5% in November
• Nevertheless, job markets in trade-sensitive sectors remain weak and economy-wide hiring intentions continue to be subdued

Canadian Inflation and Outlook

• Inflation measured by the Consumer Price Index (CPI) slowed to 2.2% in October, as gasoline prices fell and food prices rose more slowly
• CPI inflation has been close to the Bank’s 2% target for more than a year, while measures of core inflation remain in the range of 2.5% to 3%
• The Bank assesses that underlying inflation is still around 2.5%
• In the near term, CPI inflation is likely to be higher due to the effects of last year’s GST/HST holiday on the prices of some goods and services
• Looking through this “choppiness,” the Bank expects ongoing economic slack to roughly offset cost pressures associated with the “reconfiguration” of trade, keeping CPI inflation close to the 2% target

Global Economic Performance

• Major economies around the world continue to show resilience to US trade protectionism, but uncertainty is still high
• In the United States, economic growth is being supported by strong consumption and a surge in AI investment
• The US government shutdown caused volatility in quarterly growth and delayed the release of some key economic data
• Tariffs are causing some upward pressure on US inflation
• In the euro area, economic growth has been stronger than expected, with the services sector showing particular resilience
• In China, soft domestic demand, including more weakness in the housing market, is weighing on growth
• Global financial conditions, oil prices, and the Canadian dollar are all “roughly unchanged” since the Bank’s Monetary Policy Report in October

Outlook

The Bank offers that if inflation and economic activity evolve broadly in line with its October projection, it sees its current policy interest rate “at about the right level” to keep inflation close to 2% while helping the economy through this period of structural adjustment.

However, the Bank also says that if uncertainty remains elevated and its outlook changes, “we are prepared to respond.”