Bank of Canada holds interest rate at 2.25% amid ’structural adjustment’

Investing.com -- The Bank of Canada maintained its target for the overnight rate at 2.25% on Wednesday, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

In its announcement, the central bank noted that major economies worldwide continue to show resilience despite U.S. trade protectionism, though uncertainty remains high. The Canadian economy grew by a stronger-than-expected 2.6% in the third quarter, primarily due to volatility in trade, while final domestic demand remained flat.

"If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment," the Bank stated.

The labor market has shown some improvement, with solid employment gains over the past three months and the unemployment rate declining to 6.5% in November. However, job markets in trade-sensitive sectors remain weak, and economy-wide hiring intentions continue to be subdued.

CPI inflation slowed to 2.2% in October as gasoline prices fell and food price increases moderated. Inflation has been close to the 2% target for more than a year, while core inflation measures remain in the range of 2.5% to 3%.

In prepared remarks ahead of a press conference set to follow the announcement, Bank of Canada Governor Tiff Macklem highlighted three key messages. First, steep U.S. tariffs on steel, aluminum, autos, and lumber have significantly impacted these sectors, with uncertainty about U.S. trade policy weighing on business investment more broadly. Second, inflationary pressures remain contained despite added costs related to trade reconfiguration. Third, the current policy rate is deemed appropriate for maintaining inflation near target while supporting economic adjustment.

"Increased trade friction with the United States means our economy works less efficiently, with higher costs and less income. This is more than a cyclical downturn—it’s a structural transition," Macklem said.

The Bank expects GDP growth to be weak in the fourth quarter before picking up in 2026. It also noted that the recent federal budget includes increased government spending, particularly in defense, which will contribute to growth in both demand and supply over time.

The next scheduled date for announcing the overnight rate target is January 28, 2026, when the Bank will also release its next Monetary Policy Report.

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