OTTAWA — The Bank of Canada chose to hold interest rates steady at its first policy meeting of the year, citing mounting uncertainty tied to global politics and upcoming trade negotiations that are clouding the economic outlook.
The central bank kept its benchmark rate unchanged at 2.25 per cent on Wednesday, a decision that economists had largely anticipated.
Governor Tiff Macklem said the Canadian economy has performed mostly as expected since policymakers paused their rate-cutting cycle in December. Still, he stressed that uncertainty remains “unusually high,” making it difficult to forecast what comes next.
While the bank’s governing council believes the current rate is appropriate, Macklem said predicting the timing—or even the direction—of the next move is increasingly challenging.
“We’ve seen a rise in unpredictability in U.S. policy recently, including threats that directly affect Canada,” Macklem noted.
Over the weekend, U.S. President Donald Trump warned he would impose 100 per cent tariffs on Canadian goods if Prime Minister Mark Carney moves forward with a trade deal with China. At the same time, Canada, the U.S., and Mexico are preparing for a scheduled review of the Canada-U.S.-Mexico Agreement (CUSMA) in July.
The Bank of Canada’s latest Monetary Policy Report, released alongside Wednesday’s rate decision, outlined several possible outcomes for the CUSMA talks—from an extension of the agreement to major renegotiations or even a complete withdrawal.
Canada’s exemption from broad U.S. tariffs on CUSMA-compliant goods has been vital for exporters, the bank warned. Losing that protection would weaken the country’s economic trajectory.
Macklem called the fate of CUSMA “a key risk” to the bank’s economic projections.
He also flagged concerns about growing pressure on the U.S. Federal Reserve, noting that any erosion of its independence could ripple into Canada due to the Fed’s global role in financial and price stability. Trump, a longtime critic of Fed Chair Jerome Powell, escalated tensions earlier this month after the U.S. Department of Justice launched a criminal probe involving the central bank.
Like the Bank of Canada, the U.S. Federal Reserve also left rates unchanged on Wednesday.
Macklem said the Bank of Canada’s priority remains supporting the economy as it adjusts to tariff-related disruptions, while ensuring inflation stays under control.
Tony Stillo, director of Canadian economics at Oxford Economics, said keeping rates at 2.25 per cent offers modest economic support without undermining price stability.
“Given the uncertain outlook, staying slightly stimulative makes sense,” he said.
Despite strong GDP growth in the third quarter, the Bank of Canada now believes the economy stalled in the final months of 2025. Policymakers pointed to volatile export activity and shifting business investment driven by tariffs as key factors.
The central bank estimates GDP growth averaged 1.7 per cent last year, with slower growth ahead—1.1 per cent in 2026 and 1.5 per cent in 2027—assuming current tariff levels remain in place.
Oxford Economics has modeled multiple scenarios around the CUSMA review. Stillo said a deal that lowers U.S. tariffs could allow the Bank of Canada to raise rates by about half a percentage point next year. A worst-case scenario, where CUSMA collapses entirely, could push Canada into recession and trigger further rate cuts.
“In that case, rates would likely stay lower for longer because the economic damage could be long-lasting,” he said.
Inflation remains complicated, influenced by temporary factors such as last year’s two-month federal tax holiday and the end of the consumer carbon price. Even so, the Bank of Canada expects inflation to hover near its two per cent target as higher trade-related costs are offset by slower economic growth.
As of Wednesday afternoon, financial markets saw just over a five per cent chance of a rate cut at the bank’s next decision on March 18, according to LSEG Data & Analytics.
CIBC chief economist Avery Shenfeld said the central bank appears firmly neutral for now. While CIBC expects no rate changes in 2026, Shenfeld noted the risks lean more toward a cut than a hike due to uncertain trade negotiations.
TD senior economist Andrew Hencic echoed that view, saying the Bank of Canada’s emphasis on CUSMA and geopolitical risks shows a cautious, data-driven approach.
“With modest growth helping keep inflation in check, we expect the bank to remain on the sidelines in the months ahead,” Hencic said.
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