The Bank of Canada is widely expected to leave its key interest rate unchanged on Wednesday, after recent data showed the economy has broadly evolved in line with the central bank’s outlook despite headwinds from US tariffs on some sectors.
Governor Tiff Macklem said borrowing costs were now broadly appropriate following a 25 basis-point rate cut in late October, adding that the benchmark rate would remain on hold unless the economic outlook shifted materially.
That guidance has shaped market expectations for the upcoming policy decision.
The central bank held its policy rate at 2.25% last month, a level it has described as the lower bound of the neutral range, where monetary policy is neither stimulative nor restrictive.
At its last meeting, the central bank said policy is broadly calibrated to keep inflation near the 2% target, provided the economy evolves as expected.
Officials also stressed they are not pre-committed and would adjust policy if the outlook worsens or inflation risks resurface.
On inflation, the tone remains cautiously reassuring. Headline CPI is expected to stay close to target as economic slack helps absorb cost pressures linked to trade realignment.
However, underlying inflation remains somewhat elevated, indicating the disinflation process is not yet complete.
Tariff impact concentrated in key sectors
So far, the impact of US tariffs on Canadian imports has been largely confined to a narrow group of industries.
Available data suggest the automotive, steel, and lumber sectors have borne the brunt of the measures, while the broader economy has remained relatively insulated.
A key mitigating factor has been the continued operation of the North American trade agreement, which has helped preserve trade flows outside the affected sectors.
As a result, tariff-related pressures have not yet translated into a more pronounced or widespread economic slowdown.
Polls and markets point to a prolonged pause
Expectations of an extended pause in monetary policy are reinforced by a new survey of economists.
Nearly 75% of the 35 analysts polled by Reuters said the central bank would keep interest rates unchanged through 2026, up from just over 60% in December.
Market pricing reflects a similar view. Money markets indicate policy is likely to remain on hold or ease slightly through mid-2026, before a gradual tightening later in the year.
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