Key Takeaways
- The Bank of Canada’s governing council is uncertain about the direction of interest rates due to trade uncertainty
- The current policy rate of 2.25% is considered appropriate for now, but future changes are difficult to predict
- The fate of the Canada-U.S.-Mexico trade agreement and structural changes in global trade are significant sources of risk
- The bank expects fourth-quarter gross domestic product in Canada to be soft, with inflation rising slightly in the next few months
- The governing council is prepared to respond to significant new shocks or changes in economic activity and inflation
Introduction to the Bank of Canada’s Decision
The Bank of Canada’s governing council has expressed uncertainty about the direction of interest rates due to trade uncertainty. In a summary of its deliberations leading up to its decision to hold its main policy rate steady at 2.25%, the central bank stated that council members believed the current rate is appropriate for now, given the global and Canadian economies’ resilience in the face of trade upheaval. However, the bank noted that it is difficult to predict when and in which direction the next change in the policy rate will be, due to the high level of uncertainty.
Assessing the Current Economic Situation
The governing council members exchanged perspectives on what it would take to change their views of monetary policy, agreeing that uncertainty remains elevated and that they would assess incoming data relative to the bank’s outlook. They noted that if a significant new shock were to materialize, or an accumulation of evidence indicated that the evolution of economic activity and inflation was materially different from what they expected, the governing council was prepared to respond. The bank cited the fate of the Canada-U.S.-Mexico trade agreement as a significant source of risk, with uncertainty leading up to and during negotiations likely weighing on business investment.
Trade Uncertainty and Its Impact on the Economy
The bank’s outlook is also being impacted by structural changes stemming from the reconfiguration of global trade. Members acknowledged that fiscal and industrial policy measures are the appropriate tools to address this structural transition, given that monetary policy cannot restore lost supply. The federal government’s support to tariff-affected sectors, including measures aimed at increasing public and private investment, is expected to take some time to have a full impact. A worst-case scenario involving the dissolution of the Canada-U.S.-Mexico trade agreement and higher tariffs would be very damaging to the Canadian economy, while a resolution of the negotiations that provided stability in North American trade policy could spur on business investment.
Economic Projections and Inflation Expectations
The governing council expected fourth-quarter gross domestic product in Canada to be soft, with increases in consumption, housing, and government spending offsetting weakness in business investment and net exports. They also expected inflation to rise slightly in the next few months. Looking through the near-term choppiness, the governing council still expected soft demand and ongoing slack in the economy to roughly offset cost pressures associated with the reconfiguration of trade, keeping consumer price index inflation close to the two percent target.
Expert Analysis and Market Implications
Desjardins managing director Royce Mendes noted that the bank’s deliberations on interest rate risks are two-sided. While market pricing for a rate hike has been delayed until December 2026, Mendes sees a possibility that it either gets pushed back even further or switches to imply cuts. More recent data has looked softer than what officials had in hand on December 10, and there remains ample headline risk from trade negotiations. This highlights the ongoing uncertainty and potential risks in the economy, and the need for the Bank of Canada to remain vigilant and prepared to respond to changing circumstances.
Conclusion and Future Outlook
In conclusion, the Bank of Canada’s governing council is navigating a complex and uncertain economic environment, with trade uncertainty and structural changes in global trade contributing to the challenges. While the current policy rate is considered appropriate for now, the bank is prepared to respond to significant new shocks or changes in economic activity and inflation. As the economy continues to evolve, it will be important to monitor the bank’s decisions and assessments, as well as the impact of trade negotiations and other factors on the Canadian economy. The bank’s commitment to maintaining low and stable inflation, while also supporting economic growth and financial stability, will be crucial in navigating the uncertain times ahead.
