Bank of Canada keeps rates at 2.25%, citing CUSMA review, U.S. tariffs, and global risks as key factors shaping economic outlook.
Bank of Canada Hits Pause on Interest Rates
OTTAWA — The Bank of Canada decided to keep its key interest rate steady at 2.25 per cent Wednesday, signalling caution as looming trade talks and global uncertainties weigh on the economy. Economists largely expected the move, but the central bank’s warnings suggest storm clouds may be forming over Canada’s economic horizon.
Governor Tiff Macklem emphasised that while the economy has generally followed the Bank’s expectations since December’s pause on easing rates, uncertainty remains “unusually high.” He described the current policy rate as “appropriate,” but admitted that predicting the next move is tricky.
CUSMA Talks Cast a Shadow
Much of the Bank’s caution stems from the upcoming review of the Canada-U.S.-Mexico Agreement (CUSMA) in July. Macklem noted that the fate of CUSMA could significantly alter Canada’s economic path, as exemptions from U.S. tariffs are critical for Canadian exports.
The stakes are high. U.S. President Donald Trump recently threatened 100 per cent tariffs on Canadian goods if Canada strikes a trade deal with China. Such moves could derail growth and trigger long-term effects beyond today’s forecasts.
“The outcome of CUSMA is an important risk to our projection,” Macklem said, adding that shifts in U.S. central bank independence could also influence Canada’s outlook.
Economic Growth and Volatility
After a strong third-quarter GDP, Canada’s economy stalled in the final quarter of 2025. The Bank cites swings in exports and business activity due to tariffs as key factors behind this volatility.
Annual GDP growth for 2025 is estimated at 1.7 per cent. Looking ahead, if current tariff levels hold steady, the Bank expects growth of 1.1 per cent in 2026 and 1.5 per cent in 2027 as businesses adjust to new trade conditions.
Tony Stillo of Oxford Economics highlighted two potential paths: easing tariffs could allow a gradual rate hike next year, while a collapse of CUSMA could trigger a recession and force the Bank to cut rates.
Inflation and Policy Outlook
Inflation is expected to hover near the Bank’s 2 per cent target despite trade disruptions and past tax changes, including the federal government’s brief tax holiday and the end of the consumer carbon price.
Financial markets currently see only a five per cent chance of a rate cut at the Bank’s next meeting on March 18. Analysts at CIBC and TD suggest the Bank is taking a neutral stance, emphasising data-driven decisions as trade negotiations unfold.
Staying on the Sidelines
Overall, the Bank of Canada is treading carefully, balancing support for the economy with its mandate to maintain price stability. Macklem’s message is clear: while rates remain unchanged for now, the path ahead depends heavily on trade developments, U.S. policy shifts, and global uncertainty.
