The Bank of Canada held its target for the overnight rate at 2.25 per cent on January 28, 2026, its second consecutive hold. The bank projected economic growth of 1.1 per cent in 2026 and 1.5 per cent in 2027, and named the upcoming review of the Canada-U.S.-Mexico Agreement a key source of uncertainty.
A hold, with a warning attached
The decision itself surprised no one. Governor Tiff Macklem said the economy has evolved broadly in line with the bank’s expectations since policymakers paused their easing cycle in December, and governing council judges the current rate “remains appropriate” — conditional on the economy continuing to track the bank’s outlook.
The caution came in what followed. Macklem warned that uncertainty remains “unusually high” and said that while council sees the policy rate as appropriate, the “timing or direction of the next change in the policy rate” is difficult to predict. “Recently you’ve seen more unpredictability in U.S. policy with all sorts of threats, including on Canada,” he said. Days earlier, U.S. President Donald Trump had threatened 100 per cent tariffs on Canadian goods if Prime Minister Mark Carney pursued a trade agreement with China.
The trade pact hanging over the outlook
The bank’s January Monetary Policy Report, released alongside the decision, put the July review of the Canada-U.S.-Mexico Agreement at the centre of Canada’s economic risks. The report modelled scenarios in which the three partners extend the pact, significantly renegotiate it, or withdraw from it entirely.
The stakes are concrete. An exemption from Washington’s blanket tariffs for CUSMA-compliant goods has been critical for Canadian exports heading south, and the bank warned that losing that reprieve would put the economy on a weaker trajectory. Macklem called the outcome of the review an “important risk to our projection.” He also said fears of eroding central bank independence in the United States — escalated by a U.S. Justice Department criminal probe into the Federal Reserve — could spill into Canada’s outlook, given the Fed’s global role in price stability.
Modest growth, inflation near target
The bank’s updated projection sees growth of 1.1 per cent in 2026 and 1.5 per cent in 2027, broadly in line with its October forecast, after growth likely stalled in the fourth quarter of 2025 following a strong third quarter. Annual growth averaged 1.7 per cent in 2025. Slower population growth and projected drops in net exports are the main drags, partly offset by consumer spending that is holding up and business investment that strengthens gradually.
Employment has risen in recent months, but the unemployment rate remains elevated at 6.8 per cent and few businesses say they plan to hire. On prices, CPI inflation picked up to 2.4 per cent in December, boosted by base-year effects from last winter’s GST/HST holiday, while the bank’s preferred core measures eased from three per cent in October to around 2.5 per cent in December. The bank expects inflation to stay close to the two per cent target, with trade-related cost pressures offset by excess supply in the economy.
What economists took from it
Analysts read the statement as deliberate neutrality. CIBC chief economist Avery Shenfeld said the bank appears “firmly neutral” on where rates go next, with his bank sticking to a call of no changes in 2026 but odds tilted toward a further cut rather than a hike, “given the potential minefield in trade negotiations ahead.” TD senior economist Andrew Hencic said the focus on CUSMA uncertainty shows a data-dependent approach, adding: “Under these conditions we expect the BoC to stay on the sidelines in the coming months.”
That is how it played out: the bank held again at its next scheduled decision on March 18, keeping the policy rate at 2.25 per cent while the CUSMA review approached. The bank’s next Monetary Policy Report is due April 29.
