Post by : Sameer Farouq

The Bank of Canada is anticipated to keep its benchmark interest rate steady in the coming week, wrapping up the year in a position of stability following unexpected economic resilience.

The central bank last adjusted its policy rate in October, lowering it to 2.25 percent, with officials indicating that this might mark the conclusion of a year-and-a-half easing cycle. Since that reduction, the latest data on inflation, economic output, and employment have exceeded analysts’ expectations, indicating the economy has managed the impacts of U.S. tariffs more effectively than predicted.

The year 2025 saw four rate reductions, adding to nine decreases since mid-2024. Current market sentiments suggest that the bank will maintain rates through much of 2026, with the likelihood of a rate hike now surpassing that of another cut.

In comparison, the U.S. Federal Reserve is expected to decrease its benchmark rate by a quarter-point this week, reducing the fed funds rate to 3.5 percent from 3.75 percent. Economists note that the Fed’s position remains somewhat restrictive amid declining labor market conditions in the U.S.

Recent remarks from Fed officials have indicated a potential reduction, even with inflation still above the 2 percent target and delays in data collection tied to the U.S. government shutdown.

Looking to the future, uncertainty looms regarding the leadership of the U.S. central bank next year. Kevin Hassett, a close ally of President Donald Trump, is viewed as a likely candidate who might favor lower borrowing rates.

Conversely, Canadian circumstances seem more straightforward. Bank of Canada Governor Tiff Macklem mentioned in October that current rates were “at about the right level” for maintaining inflation targets while aiding economic adjustments. He noted that any further reductions would necessitate a significant deterioration in prospects.

Recent statistics lend credence to this cautious stance. Annual CPI inflation was recorded at 2.2 percent in October, with core measures hovering near 3 percent. Labor market indicators point to steady improvements, with 54,000 new jobs created in November and unemployment reducing to 6.5 percent.

Economic output also showed strength in the third quarter, sidestepping a technical recession. While a portion of the 2.6 percent annualized growth was attributed to decreased imports, this figure surpassed expectations. Additionally, revisions to historical GDP data from 2022 to 2024 reflect a stronger pace of growth than previously estimated.

Analysts suggest that this firmer trend helps explain the persistent core inflation rates and raises questions about whether the central bank would have acted as decisively had it known this information sooner.

As we look towards 2026, challenges like the review of the USMCA trade agreement persist. Nevertheless, policymakers emphasize that monetary policy is not the appropriate remedy for trade-related disruptions, underlining the limitations of interest rates in adjusting specific sectors.

They argue that the central bank’s objective is to prevent spillovers and support broader economic adjustments rather than directly responding to tariffs or trade uncertainties.

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