Bank of Canada Holds Interest Rate as Strategic Reserve
The Bank of Canada has maintained its key interest rate at 2.25% as of October 29, 2024. Governor Tiff Macklem stated that the cycle of interest rate cuts, which began in June 2024, has concluded. This decision reflects a significant shift in the Canadian economic landscape.
Economic Context and Interest Rates
From June 2024, the Bank of Canada implemented a series of nine consecutive rate reductions. The main goal was to combat inflation, which was a major concern from 2022 to 2024, when the rate peaked at 5%.
The arrival of former U.S. President Donald Trump brought increased tariffs on exports, particularly affecting sectors such as automotive, steel, aluminum, and lumber. This created uncertainty regarding trade relations between Canada and the U.S., negatively impacting the Canadian economy and job market.
Dalibor Stevanovic, an economics professor, noted that the U.S. tariffs reduced demand for Canadian exports. Consequently, the Bank of Canada lowered interest rates to stimulate economic growth.
Future Projections and Economic Growth
Tiff Macklem’s recent comments suggest a more stable outlook. Benoit Durocher, a senior economist at Desjardins, believes the current rate may remain unchanged through 2026 and possibly into 2027. Several factors support this projection, including steady economic growth in Canada.
The Bank of Canada forecasts a GDP growth of 1.2% for 2025, followed by 1.1% in 2026 and 1.6% in 2027. In July 2025, Canadian exports’ compliance rate with the USMCA reached an impressive 84%, a significant increase from just over 30% at the beginning of the year.
Employment and Inflation Monitoring
Recent economic data aligns with the Bank of Canada’s assessments. There has been a notable rebound in employment, alongside a slight decline in the unemployment rate, which stood at 6.9% in October. However, the labor market remains fragile due to ongoing trade uncertainties.
- Percentage of SMEs planning job cuts: 16%
- Percentage of SMEs planning new hires: 12%
Matthieu Arseneau, Deputy Chief Economist at a bank, pointed out that core inflation is approaching the Bank of Canada’s target but remains below 2%. Notably, the inflation rate excluding taxes is approximately 3%.
Trade Relations and Economic Stability
Arseneau emphasized that any period of stability anticipated by the Bank of Canada is largely dependent on resolving trade tensions with the United States. He stated that without clear visibility regarding market access, the Canadian economy could be jeopardized.
Durocher added that various economic indicators, such as consumer spending and business investments, are crucial for upcoming decisions from the central bank. In this volatile environment, maintaining effective communication about interest rate intentions is vital.
Since early 2022, the Bank of Canada’s key interest rate has fluctuated from 0.25% to 5%, before stabilizing at 2.25%. Clear communication will help reassure economic actors and markets moving forward.
Ultimately, keeping interest rates at 2.25% for the coming quarters could provide the Bank of Canada with the flexibility to respond to future economic challenges.
