Key Takeaways:
- The Bank of Canada sees the upcoming review of the Canada–United States–Mexico Agreement (CUSMA) as a significant risk to their economic outlook.
- The central bank is holding its interest rate at 2.25 per cent, with policymakers believing it is at "about the right level" to keep inflation contained and support the economy.
- The Canadian economy is showing more resilience than expected under U.S. tariffs, with a 2.6 per cent expansion in the third quarter.
- Many economists expect the Bank of Canada to hold its rate steady for 2026 due to high uncertainty.
- The labour market is showing strength, with a falling unemployment rate, but job gains are mostly in part-time work and hiring intentions are subdued.
Introduction to the Bank of Canada’s Interest Rate Decision
The Bank of Canada’s governing council has released a summary of their recent deliberations, providing insight into their decision to hold the interest rate at 2.25 per cent on December 10. The council’s discussions were influenced by the upcoming review of the Canada–United States–Mexico Agreement (CUSMA), which is seen as a significant risk to their economic outlook. The uncertainty surrounding the CUSMA negotiations is expected to weigh on business investment, and policymakers are preparing for potential outcomes, including a worst-case scenario involving the dissolution of CUSMA and higher tariffs.
The Impact of CUSMA on the Economy
The CUSMA review is a major concern for the Bank of Canada, as it has the potential to significantly impact the Canadian economy. The council discussed the potential outcomes of the negotiations, including a scenario where CUSMA is dissolved and tariffs are increased. This would likely have a negative impact on trade and investment, and policymakers are preparing for this possibility. On the other hand, a resolution of the CUSMA negotiations that provides stability for North American trade policy could have a positive impact on the economy. The council is closely monitoring the situation and is prepared to react if their outlook changes materially.
The Current State of the Economy
Despite the uncertainty surrounding CUSMA, the Canadian economy is showing more resilience than expected. The economy expanded by 2.6 per cent in the third quarter, topping the central bank’s forecast of 0.5 per cent. There were also upward revisions to GDP from Statistics Canada for 2022, 2023, and 2024. The labour market is also showing strength, with the unemployment rate falling to 6.5 per cent in November. However, most of the job gains were in part-time work, and vacancies remain low, with hiring intentions subdued. The council noted that while the economy is showing signs of resilience, uncertainty remains high, and they will remain cautious in interpreting incoming data.
The Bank of Canada’s Interest Rate Decision
The Bank of Canada’s decision to hold the interest rate at 2.25 per cent was influenced by the current state of the economy and the uncertainty surrounding CUSMA. The council believes that the current policy rate is at "about the right level" to keep inflation contained and support the economy through the structural adjustment caused by a trade war with the United States. However, given the high level of uncertainty, the council is unsure when and in which direction the next change in the policy rate will be. Many economists expect the Bank of Canada to hold its rate steady for 2026, and the council will continue to monitor the situation and adjust their policy as needed.
Conclusion and Future Outlook
In conclusion, the Bank of Canada’s governing council is closely monitoring the situation surrounding CUSMA and its potential impact on the Canadian economy. While the economy is showing signs of resilience, uncertainty remains high, and the council is prepared to react if their outlook changes materially. The council will continue to monitor the labour market, inflation, and other economic indicators, and adjust their policy as needed to keep inflation contained and support the economy. As the CUSMA review approaches, the Bank of Canada will be watching closely, and their decision on interest rates will depend on the outcome of the negotiations and the impact on the Canadian economy.