The Bank of Canada held its benchmark interest rate steady Wednesday and forecasts a gradual economic recovery from the U.S. tariff shock.
The policy rate remains at 2.25% after the central bank’s first decision of the year.
Economists had widely expected the hold.
Bank of Canada governor Tiff Macklem said in prepared remarks that the economy has evolved broadly in line with the central bank’s expectations since hitting pause on its interest rate easing cycle in December.
But he also warned that uncertainty remains “unusually high,” particularly around geopolitical risks and the upcoming review of the Canada-U.S.-Mexico agreement.
Macklem said it’s “too early to tell how well the Canadian economy will adjust to current tariffs and ongoing uncertainty.”
He said the central bank’s governing council sees the policy rate as “appropriate” based on the central bank’s outlook, but the “timing or direction of the next change in the policy rate” is difficult to predict.
The Bank of Canada released updated forecasts for the economy and inflation alongside Wednesday’s rate decision.
Coming off strong annual gross domestic product growth in the third quarter, the central 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% last year. The central bank sees more modest growth of 1.1% in 2026 and 1.5% in 2027 as businesses adjust to the new trade realities.
Globally, the Bank of Canada sees GDP growth higher at a little over 3% 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 2% target over the forecast horizon as higher costs from trade disruptions are offset by a weaker economy.
The central bank’s next interest rate decision is set for March 18.