The Bank of Canada remains on hold for the second consecutive time, with a high degree of uncertainty in the future policy path.

The Bank of Canada announced on Wednesday that it will maintain the benchmark interest rate at 2.25%, in line with market expectations and the results of surveys of economists by the media. The policy statement and remarks by Governor Macklem sent a strong signal that the duration of the current pause in interest rate cuts or hikes and the next policy direction remain highly uncertain. In his prepared remarks, Macklem pointed out that the Canadian economy is adjusting to "structural resistance caused by American protectionism" and emphasized the high current level of uncertainty, making it difficult for the central bank to determine the timing and direction of the next policy rate adjustment. "The high level of uncertainty makes it difficult for us to predict the timing or direction of the next policy rate change." Although the central bank is maintaining a wait-and-see stance, officials hinted that only significant changes in economic outlook could push policy away from its current level, and reiterated that the central bank is "ready to respond at any time." Macklem stated: "Given that the economy broadly aligns with the assumptions underlying our current forecast, the current policy rate is still appropriate." Following the announcement, the Canadian dollar continued to rise against the US dollar, gaining 0.3% to 1 Canadian dollar to 1.3536 US dollars, its strongest level since October 2024. The Canadian bond market reacted mildly, with the two-year bond yield remaining around 2.58%. Latest economic forecasts: Mild growth but possible stagnation in the fourth quarter The Bank of Canada updated its economic forecasts in its latest monetary policy report, expecting the Canadian economy to grow by 1.1% this year and by 1.5% by 2027, which is overall "largely consistent" with the forecast made last October. The central bank anticipates a possible stagnation in economic output in the fourth quarter of 2025, but also noted that the damage from tariff impacts on the economy was lower than previously estimated, leading to an upward revision of the growth forecast for the full year of 2025 to 1.7%. Market consensus suggests that the Bank of Canada is currently more inclined to observe fluctuations in US tariff policies and their transmission effects on the Canadian economy before deciding on the next course of action. However, the central bank also explicitly refuted expectations in the market of a "prolonged pause" or even an "inevitable rate cut", emphasizing that in the high level of uncertainty, the next action could be a rate cut or a rate hike. The Bank especially pointed out that the upcoming review of the USMCA agreement will be a key risk point in economic outlook. "US trade policy is still unpredictable, and geopolitical risks remain high," Macklem stated, adding that it is "still too early to tell whether the Canadian economy can successfully adapt to current tariffs and continued uncertainty." Macklem noted that the impact of US tariffs has already been reflected in the labor market, particularly in early 2025, as industries affected by tariff impacts reduced output and jobs. Despite some improvement in employment in the second half of this year, the unemployment rate remains high at 6.8%, with youth unemployment also high and a decline in business hiring intentions. Inflation is expected to approach the 2% target with both upward and downward risks The central bank expects inflation to remain around the 2% target in the future, with cost pressures related to trade being offset by "excess supply" in the economy. The central bank highlighted that upward risks to inflation include the economy operating below expectations or businesses making structural adjustments to deal with tariffs, leading to higher costs; while downward risks come from trade shocks having a greater impact on the economy or financial tightening exceeding expectations. Data shows that overall inflation in December was 2.4% year-on-year, mainly influenced by the base effect of temporary sales tax exemptions last winter. The core inflation index preferred by the central bank has dropped to around 2.5%. Additionally, the Bank of Canada raised its potential economic growth rate forecast for 2025 to 2.3% (previously 1.6%), indicating that overall there is "little change" in the degree of economic slack, with the output gap expected to persist until the end of 2027. Outlook for consumption and investment: Mild support but recovery takes time The central bank believes that past rate cuts and growth in disposable income for residents will support a modest recovery in household consumption. Predictions show that consumption will contribute 0.7 percentage points to GDP in 2026 and 0.6 percentage points in 2027, slightly lower than the forecast made last October. Business investments are also expected to slightly strengthen, as companies adjust to the new trade environment and government infrastructure spending increases provide support. The central bank forecasts that business fixed investment will contribute 0.1 percentage points to GDP this year and 0.3 percentage points next year. Macklem emphasized that the structural adjustment of the Canadian economy, including diversifying trade and integrating the domestic market, will help restore production capacity, but this process will take time. He stated: "Monetary policy cannot compensate for the structural damage caused by tariffs, nor can it accurately target the industries most severely affected."