Canada’s Key Interest Rate May Stay Frozen Longer Than Expected
So, let’s talk about what’s happening with Canada’s key interest rate, because the conversation around it has taken a surprising turn. After nearly two years of aggressive rate hikes meant to cool down inflation, the Bank of Canada has shifted gears in a big way. The policy rate, which had climbed as high as 5%, was brought back down to 2.25% on October 29. And according to Governor Tiff Macklem, that long streak of rate cuts—nine in a row since June 2024—has officially come to an end. At least, that’s the plan for now.
What’s interesting is how quickly the economic climate has changed. Not long ago, inflation was the country’s biggest headache. Now, the problem looks very different. When Donald Trump returned to the White House, he reintroduced stiff tariffs targeting key Canadian exports—autos, steel, aluminum, lumber. These measures didn’t just slow demand; they created widespread uncertainty about the future of Canada-U.S. trade. Because of this, the central bank went from fighting an overheated economy to trying to keep the country’s economic engine from sputtering out.
Experts say the recent rate decisions reflect that shift clearly. The Bank of Canada has been trying to boost activity, and cutting rates was its main tool. As economist Dalibor Stevanovic explains, the American tariffs essentially pushed the Bank to stimulate the economy rather than cool it off.
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But now, with months of adjustments underway, things appear slightly more stable. Some economists, like Benoit Durocher from Desjardins, believe the policy rate could actually remain unchanged through 2026—and possibly part of 2027. The Bank is forecasting slow but steady growth: a 1.2% boost to GDP in 2025, followed by 1.1% in 2026 and 1.6% in 2027. It’s not booming, but it’s progress.
A big reason the fallout from U.S. tariffs hasn’t been as bad as feared is the Canada–U.S.–Mexico Agreement (CUSMA). More Canadian exports are meeting its compliance requirements, which means lower tariffs. By July 2025, the compliance rate hit a record 84%, up from just 30% at the start of the year.
Still, there are real vulnerabilities. The labour market has shown small signs of improvement, but unemployment was still sitting at 6.9% in October. Many companies are hesitant to hire, and some are preparing to cut staff. Inflation, meanwhile, continues to edge toward the Bank’s 2% target—but only if you include temporary effects like the removal of the carbon tax. Without that, the underlying inflation rate looks closer to 3%.
For now, the message seems clear: the Bank of Canada is trying to hold its position and keep some “ammunition” ready. Stable rates give policymakers room to maneuver if conditions worsen. But everything depends on whether trade tensions with the U.S. cool off soon. If they don’t, another round of rate cuts isn’t out of the question.
So, while the rate sits at 2.25% today, the real story is about uncertainty—and how Canada’s central bank is trying to navigate it without running out of options.
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