Bank of Canada Governor Tiff Macklem cut the central bank’s rate in Oct., 2025, and indicated this would likely be the last in an easing cycle.Adrian Wyld/The Canadian Press
The Bank of Canada is expected to end the year back on the sidelines, likely holding interest rates steady on Wednesday after a string of surprisingly sturdy economic reports.
The central bank cut its benchmark policy rate to 2.25 per cent in October, but indicated that this would likely be the last cut in an easing cycle that began a year-and-half earlier.
Since then, inflation, economic growth and employment data have all surprised to the upside, suggesting the Canadian economy has weathered U.S. tariffs better than expected in recent months.
After four rate cuts this year – and nine since the summer of 2024 – markets now believe the central bank will remain on hold though most of next year, with the next move more likely to be a hike than a cut, according to Bloomberg data.
The story is different south of the border, where the U.S. Federal Reserve will announce its latest rate decision on Wednesday afternoon.
Having cut fewer times than the Bank of Canada, the Fed’s monetary policy stance remains restrictive, even as the U.S. labour market has weakened. Investors are betting the U.S. central bank will cut by another quarter-point this week, taking the federal funds target range to 3.5 per cent to 3.75 per cent.
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“Our base case forecast a month ago did not assume a December cut from the Fed, given inflation in the U.S. remains above the central bank’s 2 per cent target, and Chair Jerome Powell’s comments at the last meeting about cautiously proceeding in a foggy environment,” Royal Bank of Canada economists Nathan Janzen and Claire Fan wrote in a note to clients, referring to the U.S. government shutdown which limited the release of economic data.
But it was always going to be a close call, Mr. Janzen and Ms. Fan wrote, and recent communication from Fed committee members suggests a cut is coming. “With some softer data during the blackout, we doubt the hawks will put up a major fight,” they said.
Looking further ahead, the trajectory for U.S. monetary policy is complicated by questions around who will succeed Mr. Powell as Fed chair when his term ends next spring.
The leading candidate is widely believed to be Kevin Hassett, a close ally of U.S. President Donald Trump and director of the National Economic Council. He is seen by many analysts as a dovish choice who would pursue Mr. Trump’s desire for lower interest rates.
U.S. Federal Reserve chair Jerome Powell’s term ends in 2026, and Trump ally Kevin Hassett is expected to take the reigns.CAROLINE GUTMAN/The New York Times News Service
The situation in Canada, by comparison, appears relatively clear cut. After the October rate decision, Bank of Canada Governor Tiff Macklem said he thought interest rates were “at about the right level to keep inflation close to 2 per cent while helping the economy through this period of structural adjustment.”
He didn’t rule out further cuts if the Canadian economy takes a nose dive. But he said there would have to be a “material” change in the bank’s economic outlook to warrant additional easing.
That hold-steady stance seems to be supported by recent data. Annual Consumer Price Index inflation clocked in at 2.2 per cent in October, while measures of core inflation remain around 3 per cent.
The latest jobs numbers, published Friday, suggest the labour market remains weak, but is trending in a positive direction. Canada added 54,000 positions in November, bringing the cumulative increase in jobs for September through November to 181,000. The unemployment rate fell to 6.5 per cent from 6.9 per cent the month before.
Meanwhile, gross domestic product growth rebounded in the third quarter after a contraction in the second.
Much of the 2.6 per cent annualized GDP growth was a statistical quirk, caused by falling imports. But the number was still notably stronger than Bay Street and central bank forecasts, and means the country avoided two consecutive quarters of negative growth, which analysts sometimes call a “technical recession.”
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There was also a major upward revision to past GDP growth numbers for 2022, 2023 and 2024, suggesting the Canadian economy was on a stronger footing than previously appreciated heading into the current period of trade tensions.
“It makes one wonder if the BoC would have eased policy as much as it did if it had known how solid momentum was. The firmer economic backdrop could also help explain why core CPI has been stickier than expected,” Benjamin Reitzes, head of Canadian rates strategy at Bank of Montreal wrote in a note to clients.
There are still plenty of risks on the horizon, including the review of the United States-Mexico-Canada free trade agreement next year, which could bring more trade turmoil. But Bank of Canada officials have repeatedly argued that monetary policy is not the right instrument to respond to trade disruptions.
“Monetary policy… can’t target the hard-hit sectors: aluminum, steel and autos. It can’t help companies find new markets. It can’t help companies reconfigure their supply chains,” Mr. Macklem said in October.
“What it can do is it can try to mitigate the spillovers from the hard-hit sectors to the rest of the economy. And it can try and help the economy adjust to this structural change.”