Bank of Canada Holds Rate at 2.25% and Confirms Overall Economic Resilience

The Bank of Canada has kept its interest rate unchanged, indicating that the Canadian economy is demonstrating greater resilience than previously expected, despite the negative impacts of the trade war with the United States. Policymakers confirmed that the current interest rate level remains appropriate for handling these conditions.

In Wednesday's meeting, the bank, led by Governor Tiff Macklem, held the interest rate at 2.25% - in line with market expectations and a Bloomberg survey.

More Resilient Economy Despite Pressures

Macklem stated that recent data shows the Canadian economy is "proving to be resilient overall" despite U.S. tariffs, and the bank sees a continuing output gap that helps keep inflation close to its 2% target.

The bank's statement noted that the current interest rate level is "approximately appropriate" if October's forecasts hold, and maintaining the rate at the "lower end of the neutral range" remains the most suitable option at this time.

The bank added:
"Uncertainty remains high. If expectations change, we are ready to respond."

Market Reaction
The Canadian dollar fell by 0.1% to 1.3860 against the U.S. dollar following the decision.
Government bonds rose, with the yield on two-year bonds dropping by 3 basis points to 2.66%.

Supportive Economic Data

Recent data indicates surprising strength in the economy:
181,000 jobs added over three months.
Real GDP growth of 2.6% in the third quarter (year-over-year).

Macklem explained that GDP revisions for 2022, 2023, and 2024 indicate that the economy was stronger than previously thought before the trade dispute with the United States, explaining some of the current resilience.

However, Macklem avoided stating that the output gap has narrowed, saying that revisions "indicate that both demand and economic capacity were higher at the beginning of this year."

The Bank's Outlook for 2026

Macklem confirmed:
"Despite changing growth dynamics in the near term, our outlook has not changed: we expect moderate growth in 2026, with inflation remaining close to the target."

No Rate Cuts Soon

The statement shows that the bank is comfortable remaining neutral for an extended period and does not see a fundamental change in the output gap.

Charles St-Arnaud, Chief Economist at Servus Credit Union, stated:
"Nothing in the statement changes our expectations that the Bank of Canada will keep rates steady for an extended period. It is clear that the threshold for a rate cut is very high and will only occur if expectations deteriorate significantly."

Future Factors That May Change the Equation
The bank will include in its January forecasts the first federal budget from Prime Minister Mark Carney.
Increases in defense spending and investment stimulus will impact demand and supply in the economy.
The review of the North American trade agreement, along with adjustments to high tariffs, will increase uncertainty.
Economic data volatility - especially trade and quarterly output - makes assessing economic momentum more challenging.

Labor Market: Partial Improvement

The bank noted:

Positives:

• Three strong months of job creation.

• Decrease in the unemployment rate.

But conversely:

• Continued weakness in trade-sensitive sectors.

• Declining hiring intentions among companies.

• Sluggish final domestic demand in the third quarter.

Catherine Judge, an analyst at CIBC, noted that the bank described the improvement as limited, indicating that the aggregate output reading was "driven by trade fluctuations and not by strong domestic growth."

Macklem and Deputy Governor Carolyn Rogers are expected to speak to reporters at 10:30 a.m. Ottawa time.