The Bank of Canada held its overnight rate steady at 2.25% this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy will likely continue to be challenged over the next year by trade volatility. Still, it expects underlying domestic demand to firm up in 2026. On inflation, the Bank expects CPI inflation to remain close to its 2% target, though it still assesses underlying (core) inflation at around 2.5%. Overall, the Bank judges the current level of its policy rate to be appropriate to keep inflation at its target while helping the economy adjust to the current period of global trade upheaval.
The complexities of global trade tensions still mean at least some downward pressure on growth, coupled with potential upward pressure on inflation. That puts the Bank in a difficult position, and, unsurprisingly, policymakers are acting with greater caution. The Bank of Canada continues to signal that its policy measures cannot offset the economic impacts of trade wars. While concerns over a tariff-driven acceleration of inflation are less of a problem now that Canada has dropped most of its retaliatory tariffs on US goods, the underlying trend in inflation remains above the Bank’s 2 per cent target. Recent revisions to Canadian GDP and a surprisingly strong 3rd-quarter headline GDP number paint a somewhat rosier picture of the economy than the underlying reality warrants. That said, market sentiment has shifted in recent weeks, with financial markets now anticipating a rate hike in 2026. That change in expectations has filtered into bond markets, prompting a dramatic rise in the 5-year bond yield to over 3%. Should that level hold, an already sluggish housing market may face rising fixed mortgage rates in the new year.
