Bank of Canada Holds Rates Steady, Warns Tariffs Limit What Monetary Policy Can Do

The Bank of Canada has kept its overnight benchmark interest rate unchanged at 2.25 per cent, signalling caution as ongoing U.S. trade tariffs continue to cloud Canada’s economic outlook.

Speaking after the decision, Governor Tiff Macklem said monetary policy has clear limits when it comes to offsetting the economic damage caused by trade barriers.

“Monetary policy cannot repair the structural harm created by tariffs, nor can it target the industries hit hardest,” Macklem said. “What it can do is support the broader economy during this period of adjustment, while keeping inflation under control.”

The decision marks the second consecutive rate hold, as policymakers assess how Canada’s economy adapts to U.S. trade restrictions. Uncertainty is expected to intensify later this year, when the Canada–United States–Mexico Agreement (CUSMA) comes up for renegotiation.

Macklem noted that the Bank’s current forecasts assume existing tariffs remain in place, while CUSMA exemptions for other sectors continue. “That assumption could change depending on how the review unfolds,” he said, adding that the central bank is prepared to adjust rates if conditions deteriorate.

Under its baseline scenario, the Bank expects economic growth to gradually improve, though momentum will be weaker this year. GDP growth is projected at around 1.7 per cent in 2025, easing to 1.1 per cent in 2026 before rising to 1.5 per cent in 2027.

Inflation is expected to hover close to the Bank’s two per cent target, though Macklem acknowledged the risks around that outlook are unusually wide. “U.S. trade policy remains unpredictable, and geopolitical risks are elevated,” he said.

Economists say further rate cuts could help stimulate growth if trade conditions worsen, but the risk of reigniting inflation remains a concern.

David-Alexandre Brassard, chief economist at Chartered Professional Accountants of Canada, said holding rates steady preserves flexibility. “With inflation slightly above target and the economy still showing resilience, the Bank has room to respond later in the year if trade tensions escalate,” he said.

In its accompanying statement, the Bank said the outlook has changed little since its October Monetary Policy Report but remains vulnerable to trade and geopolitical shocks. While domestic demand is showing signs of recovery and employment has increased in recent months, exports continue to suffer under U.S. tariffs.

Recent data from Statistics Canada showed GDP contracted by 0.3 per cent in October. The unemployment rate also climbed to 6.8 per cent in December, up from 6.5 per cent the month before. Consumer inflation stood at 2.4 per cent in December, close to the Bank’s target.

Shannon Terrell, a financial expert with NerdWallet Canada, said the decision reflects a cautious “wait-and-see” stance. “Headline inflation may be within range, but essential costs, particularly food, remain a concern. Stability matters when trade relationships are shifting so quickly,” she said.

With no change to the policy rate, borrowing costs for Canadians remain steady. Mortgage rates, car loans and variable-rate products are unlikely to shift unless lenders make independent adjustments or the Bank changes course later.

For households already strained by high living costs, the pause offers little immediate relief. Stacy Yanchuk Oleksy, a personal finance expert at Money Mentors, said many families remain stuck in limbo.

“Holding rates doesn’t solve affordability pressures it just freezes them,” she said. “People aren’t necessarily in crisis, but they’re not moving forward either, and that ongoing financial stress is taking a real toll.”

For now, the Bank of Canada says it is watching developments closely, ready to act if trade conditions or inflation expectations shift meaningfully in the months ahead.