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Bank of Canada Holds Overnight Rate, Updates Economic Outlook

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Bank of Canada Holds Overnight Rate

The Bank of Canada (BOC) today announced its decision to maintain the target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

This decision aligns with the Governing Council's assessment that the current policy rate remains appropriate.

The Governing Council stated this position is conditional on the economy developing as outlined in today's outlook, and the Bank is prepared to adjust policy if the outlook changes.

Economic Outlook

The BOC's outlook for both the global and Canadian economies shows minimal change compared to the October Monetary Policy Report (MPR) projections. However, the outlook faces potential risks from unpredictable US trade policies and broader geopolitical events.

Global Economy

Economic growth in the United States continues to exceed expectations, largely driven by AI-related investments and robust consumer spending. While tariffs are contributing to US inflation, their impact is anticipated to lessen later this year.

In the Eurozone, growth is supported by the service sector and is expected to receive further backing from fiscal policy initiatives.

China's GDP growth is projected to decelerate gradually as domestic demand weakens, though this trend is partially offset by strong exports.

Overall, the Bank anticipates an average global growth rate of approximately 3% over the projection period.

Global financial conditions have largely remained accommodative. The Canadian dollar has risen above 72 cents due to recent US dollar weakness, while oil prices have fluctuated, influenced by geopolitical events.

Canadian Economy

Modest economic growth is projected for Canada in the near term. This is primarily attributed to slowing population growth and necessary adjustments to US protectionist measures.

Following a strong third quarter, GDP growth in the fourth quarter is estimated to have stalled. Exports continue to be affected by US tariffs, while domestic demand shows signs of picking up.

Employment has increased in recent months, but the unemployment rate remains elevated at 6.8%. Few businesses currently report plans for increased hiring.

The Bank forecasts Canadian economic growth of 1.1% in 2026 and 1.5% in 2027, consistent with the October projections.

Consumer spending is expected to hold steady, and business investment is anticipated to strengthen gradually, with some support from fiscal policy. Uncertainty regarding the upcoming review of the Canada-US-Mexico Agreement (CUSMA) is also noted.

Inflation

CPI inflation reached 2.4% in December, partly due to base-year effects from a previous GST/HST holiday. Excluding these tax changes, inflation has been decelerating since September.

The Bank's preferred measures of core inflation have decreased from 3% in October to approximately 2.5% in December.

Inflation was 2.1% in 2025, and the Bank expects it to remain near the 2% target throughout the projection period.

Trade-related cost pressures are anticipated to be largely offset by excess supply within the economy.

Monetary Policy Stance

The Bank of Canada's monetary policy remains focused on maintaining inflation close to the 2% target while guiding the economy through a period of structural adjustment.

The Governing Council considers the current policy rate appropriate, conditional on the economy developing as outlined in today's outlook.

The Bank is closely monitoring risks due to heightened uncertainty and is prepared to adjust policy if the outlook changes.

Market Reaction & Revisions

Following the statement, market expectations for rate hikes in 2026 slightly increased. The Canadian dollar saw a modest strengthening.

Highlights from the MPR include:

  • 2025 GDP: Revised to 1.7% (previously 1.2%)
  • 2026 GDP: Revised to 1.1% (previously 1.6%)
  • 2027 GDP: Revised to 1.5% (previously 1.6%)
  • 2026 CPI: Revised to 2.0% (previously 2.1%)

Statistics Canada's revisions to historical GDP data indicated that the Canadian economy entered 2025 in a stronger position than previously understood, with GDP revised upwards by 1.7%.

International GDP Estimates (2026):

  • USA: 2.6% (previously 2.2%)
  • Eurozone: 1.2% (previously 1.0%)
  • China: 4.5% (previously 4.4%)
  • Global: 3.2% (previously 2.9%)