Bank of Canada Delivers 25bps Cut as Expected

The Bank of Canada held its overnight target rate unchanged at 2.25% in its January 2026 meeting, aligned with market expectations and its earlier guidance, and noted that the current policy remains appropriate given the Bank's baseline economic outlook. Still, recent tariff threats from US President Trump reignited concerns of trade disruptions and drove the Governing Council to warn of uncertainty, potentially warranting a an adjustment in monetary policy in either direction. The central bank loosely maintained their economic projections from October's Monetary Policy Report, with the Canadian GDP expected to rise over 1% this year and 1.5% next year. Additionally, CPI inflation is expected to remain close to the 2% target as trade-related cost pressures are offset by excess supply in the aggregate.

The Bank of Canada held its target overnight rate at 2.25% in December 2025, keeping the Bank Rate at 2.50% and the deposit rate at 2.20% after signalling in October that the policy rate was about right. Growth surprised to the upside with GDP expanding 2.6% in the third quarter, while the labour market showed improvement as the unemployment rate fell to 6.5% in November. CPI inflation slowed to 2.2% in October and the Bank judges measures of core inflation remain in the 2.5% to 3% range with underlying inflation around 2.5%. Policymakers noted ongoing global uncertainty, tariff driven pressures and volatile trade which may continue to cause quarterly swings in GDP. If inflation and activity evolve broadly in line with the October projection the Governing Council sees the current policy rate about right to keep inflation close to 2% while helping the economy through this period of structural adjustment, but it stands ready to respond if the outlook changes.

The Bank of Canada lowered its benchmark overnight rate by 25bps to 2.25% in its October 2025 meeting, as expected by markets, and signaled that it likely done with its cutting cycle if its base economic projection holds under the current uncertain backdrop. The cut followed a 25bps rate reduction last meeting, the first since March, as headline inflation hovered around the 2% target while tariffs from the US and a slowing job market drove the Governing Council to opt for looser financing conditions. Policymakers noted that structural damage caused by trade conflict reduced capacity in the economy, consistent with the annualized 1.6% contraction in the Q2 GDP. Still, the BoC expects the GDP to expand by 1.2% this year and 1.1% next year. In the meantime, the BoC's preferred core inflation gauges remained sticky around the 3% level, but the Council seas underlying price growth converging towards target under the current rate.