Yesterday, in its first announcement of 2026, the Bank of Canada opted to hold the target for the overnight lending rate at 2.25%. This marks the second consecutive hold to interest rates.
Ongoing United States trade restrictions and geopolitical uncertainty continue to weigh on Canada’s economic growth and dampen consumer confidence. At the same time, inflation has remained relatively stable, giving the Bank of Canada room to maintain its current policy stance. Holding interest rates steady reflects a cautious approach as the Canadian economy adjusts to evolving economic conditions, balancing the need to support growth while keeping inflation firmly under control.
“The Canadian economy is adjusting to the structural headwinds of US protectionism. Businesses are reconfiguring supply chains and investing in new markets. We also expect to see some reallocation of capital and workers as new opportunities open up. This restructuring, including more diversified trade and a more integrated internal market, will support some recovery in our productive capacity. But it will all take some time,” said Tiff Macklem, Governor of the Bank of Canada, in a press conference with reporters following the announcement.
“Monetary policy cannot compensate for the structural damage caused by tariffs, and it cannot target hard-hit sectors of the economy. But it can play a supporting role, helping the economy through this period of structural change, while maintaining inflation close to the 2% target.”
Canada’s Consumer Price Index (CPI) rose 2.4% year over year in December, up from 2.2% in November, largely due to the federal government’s GST/HST holiday tax break that ran from December 2024 through February 2025, a temporary factor that distorted year-over-year comparisons. Meanwhile, the unemployment rate held steady in December, following three consecutive months of employment gains in September, October and November.
