As widely expected, the Bank of Canada (BoC) kept its benchmark interest rate at 2.25% at its event on Wednesday.
In his news conference, Governor Tiff Macklem said the Canadian economy has shown amazing resilience despite the U.S. tariffs, helped in part by recent Statistics Canada reviews that indicated growth was stronger than previously thought before the sanctions took effect. He noted that inflationary pressures remain under control and reiterated the view that GDP will expand at a moderate pace in 2026, with inflation remaining near the 2% target. A temporary rise in prices is expected in the near term due to last year’s tax break, although he stressed that the federal budget did not add significant additional inflationary pressures and that its ultimate impact will depend on the speed and effectiveness of implementation.
Macklem said that keeping the interest rate near the lower end of the neutral range continued to provide adequate support to the economy, while emphasizing that decisions will be made one by one based on the incoming data. He also acknowledged the challenge for Statistics Canada in accurately measuring economic activity.
Senior Deputy Governor Caroline Rogers added that the bank did not want to see prices fall and highlighted a better balance in the housing market, saying that no further rise in house prices was expected.
Bank of Canada FAQs
The Bank of Canada (BoC), headquartered in Ottawa, is the institution that sets interest rates and manages Canada’s monetary policy. It does this at eight scheduled meetings annually and ad hoc emergency meetings held as appropriate. The Bank of Canada’s primary mandate is to maintain price stability, which means keeping inflation at a level of 1-3%. The main tool for achieving this is raising or lowering interest rates. Relatively high interest rates usually lead to a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme cases, the Bank of Canada can enact a policy tool called quantitative easing. Quantitative easing is the process by which the Bank of Canada prints Canadian dollars for the purpose of purchasing assets—usually government or corporate bonds—from financial institutions. Quantitative easing usually leads to a weaker Canadian dollar. Quantitative easing is considered a last resort when simply lowering interest rates is unlikely to achieve the goal of price stability. The Bank of Canada used this measure during the Great Financial Crisis of 2009-2011 when credit froze after banks lost confidence in each other’s ability to repay debts.
Quantitative tightening (QT) is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation begins to rise. Whereas in QE, the Bank of Canada buys government and corporate bonds from financial institutions to provide them with liquidity, in QE, the Bank of Canada stops purchasing any more assets, and stops reinvesting the capital owed on the bonds it already holds. It is usually positive (or bullish) for the Canadian dollar.
