OTTAWA — The Bank of Canada held its benchmark interest rate steady at 2.25 per cent Wednesday and forecasts a gradual economic recovery from the U.S. tariff shock.
But the upcoming review of the Canada-U.S.-Mexico agreement later this year and other emerging geopolitical risks are casting a cloud over the central bank’s outlook.
Bank of Canada governor Tiff Macklem said that the economy has evolved broadly in line with the central bank’s expectations since monetary policymakers hit pause on the interest rate easing cycle in December.
But he also warned that uncertainty remains “unusually high.”
Macklem said the bank’s governing council sees the policy rate as “appropriate” based on its outlook, but the “timing or direction of the next change in the policy rate” is difficult to predict.
“Recently you’ve seen more unpredictability in U.S. policy with all sorts of threats, including on Canada,” Macklem said.
This past weekend, U.S. President Donald Trump said he would levy 100 per cent tariffs on Canadian goods if Prime Minister Mark Carney pursues a trade agreement with China.
Canada, the United States and Mexico are also set to review CUSMA, the North American trade pact, in July.
The Bank of Canada’s updated monetary policy report released alongside the rate decision Wednesday included various scenarios that could see the partners extend, significantly renegotiate or withdraw from CUSMA entirely depending on the outcome of this year’s talks.
An exemption to the United States’ blanket tariffs for goods compliant with CUSMA has been critical for Canada’s exports heading south of the border, and the central bank warned an end to that reprieve would put the economy on a weaker trajectory.
Macklem said the outcome of CUSMA is also an “important risk to our projection.”
He also said fears of eroding central bank independence in the United States could impact the outlook in Canada, given the U.S. Federal Reserve’s global role in maintaining financial and price stability. Trump has long been a critic of Fed chair Jerome Powell but the situation escalated earlier this month when the Department of Justice launched a criminal probe into the U.S. central bank.
Coming off strong annual gross domestic product growth in the third quarter, the bank now expects the economy stalled in the final quarter of 2025. Swings in export volumes and other business activity responding to tariffs are driving volatility in the quarterly GDP readings, monetary policymakers noted.
The Bank of Canada is expecting annual GDP growth averaged 1.7 per cent last year. The central bank sees more modest growth of 1.1 per cent in 2026 and 1.5 per cent in 2027 as businesses adjust to the new trade realities.
Globally, the bank sees GDP growth higher at a little over three per cent for the coming years.
Projected drop-offs in net exports are a primary factor for Canada’s relative economic weakness, but forecasters at the central bank also cited slowing population growth as a drag on activity.
The inflation picture is also somewhat messy, thanks to tax changes like the federal government’s two-month tax holiday this time a year ago and ongoing impacts from the end of the consumer carbon price last spring.
But the Bank of Canada broadly sees annual inflation holding around its two per cent target over the forecast horizon as higher costs from trade disruptions are offset by a weaker economy.
Economists had widely expected the Bank of Canada would hold its policy rate Wednesday.
CIBC chief economist Avery Shenfeld said in a note to clients Wednesday that the Bank of Canada appears “firmly neutral” on where interest rates head from this point.
He said CIBC is sticking to its call for no rate changes in 2026, but the odds are tilted toward a further cut rather than a hike, “given the potential minefield in trade negotiations ahead.”
TD senior economist Andrew Hencic said in a note that while the rate hold was expected, the central bank’s focus on uncertainty surrounding CUSMA and geopolitical risks shows monetary policymakers are taking a data-dependent approach to future decisions.
He said TD’s forecast is in line with the Bank of Canada’s, with modest growth helping to tame inflation.
“Under these conditions we expect the BoC to stay on the sidelines in the coming months,” Hencic said.
The central bank’s next interest rate decision is set for March 18.
This report by The Canadian Press was first published Jan. 28, 2026.
Craig Lord, The Canadian Press
