Bank of Canada holds interest rate at 2.25 per cent – January 28, 2026

Good morning. I'm very pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our decision and monetary policy report. Today, Governing Council maintained our policy interest rate at two and a quarter percent. Our forecast for economic growth and inflation in Canada has not changed significantly since our October projection. As the Canadian economy continues to adjust to US trade restrictions, we expect the economy to grow modestly and inflation to stay close to our 2% target.

However, uncertainty around our forecast is heightened. The range of possible outcomes is wider than usual. US trade policy remains unpredictable and geopolitical risks are elevated. Our monetary policy decisions are focused on keeping inflation close to the 2% target while helping the economy through this period of structural change. Governing council judges the current policy rate remains appropriate conditional on the economy evolving broadly in line with the outlook we published today.

With heightened uncertainty, we are monitoring risks closely. If the outlook changes, we are prepared to respond.

So, let me expand on what we've seen in the economy since October and what we see ahead. Tariffs and uncertainty continue to disrupt the Canadian economy. After a strong third quarter, economic growth likely stalled in the fourth quarter. Exports continue to be buffeted by US tariffs while domestic demand appears to be picking up. Household spending is expected to continue growing moderately supported by past cuts in interest rates and rising disposable incomes.

US tariffs and related uncertainty have held back business investment. But we expect some modest strengthening in investment as businesses adjust to the new trade environment and governments increase infrastructure spending.

The impact of US tariffs can also be seen in the labor market. Employment weakened in the first half of 2025 as sectors hit hard by US tariffs cut production and jobs. In recent months, overall employment has risen, led by hiring in services like healthcare. At the same time, slowing population growth is reducing the number of new entrants into the labor market.

Still, the unemployment rate remains high at 6.8%. Youth unemployment is particularly elevated and relatively few businesses say they plan to hire more workers in coming months.

Overall, economic growth is expected to pick up gradually. The Bank of Canada projects annual average GDP growth of 1.1% in 2026 and 1.5% in 2027, broadly in line with our October projection.

Turning to inflation, it averaged 2.1% last year and has now been within the 1 to 3% band for two years. If we focus on recent movements, CPI inflation rose to 2.4% in December, boosted by base effects linked to last year's GST HST holiday.

The bank's preferred measures of core inflation have eased from 3% in October to around two and a half percent in December. The bank expects CPI inflation to stay close to the 2% target over the projection as tariff related cost pressures are offset by excess supply.

Uncertainty around this projection is unusually high. Geopolitical risks are elevated and the upcoming review of the Canada, US, Mexico agreement is an important risk to the outlook.

It's also still too early to tell how the Canadian economy will adjust to current tariffs and ongoing uncertainty. The transition to the new trade environment could be smoother than we expect with stronger business and household spending. Alternatively, the labor market could weaken further as trade impacts deepen leading to lower household spending. And financial conditions could also tighten if volatility returns to markets.

Considering both our baseline forecast and the risks, the governing council discussed the future path of monetary policy.

While council judges the current policy rate is appropriate based on our outlook, the consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy interest rate.

So let me wrap up.

The Canadian economy is adjusting to the structural headwinds of US protectionism. Businesses are reconfiguring supply chains and investing in new markets. We also expect to see some reallocation of capital and workers as new opportunities open up.

This restructuring, including diversifying trade and a more integrated internal market, will support some recovery in our productive capacity, but it will take some time.

Monetary policy cannot compensate for the structural damage caused by tariffs and it can't target hard-hit sectors of the economy.

But it can play a supporting role helping the economy through this period of structural adjustment while maintaining inflation close to the 2% target.

The bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. And with that, the senior deputy governor and I would be very pleased to take your questions. Thank you.

Paul, what we are saying is that uncertainty around our forecast is unusually high. There are a number of risks and uncertainties. Geopolitical risks, geopolitical uncertainties have increased. They're heightened. US trade policy remains highly unpredictable. And for Canada, yes, CUSMA, what happens, what the outcome is of the review of CUSMA is an important risk to our projection. I mean what we have built into our projection is that tariffs that are currently in place remain in place. So what that means is that the tariffs on the hard sector stay, the CUSMA exemptions for everything else remain in place. That could change with the review. The other thing we have in our projection is I mean the uncertainty is already having an impact on the economy that's built into our projection. We have that gradually diminishing over time. But yes, CUSMA is under review. And the outcome of that, you know, there's obvious risk to the projection. The outcome may not be no change. And we highlighted that in the press release and in the back of the monetary policy report. We go through a number of possible outcomes for CUSMA. I would stress that we've done a number of scenarios. They've been in our monetary policy report. We've published them in speeches as well with a whole range of different configurations of US tariffs. We found those useful in our decision-making and I think it's never easy to manage uncertainty. But I think they do help us think through the channels and some quantification of the impacts of different CUSMA outcomes.

Well, look, I think there's, you're right, there's a lot packed into that. You've got a number of very hard-hit sectors in Canada. Steel, aluminum, lumber, auto industry. They clearly are looking for new opportunities to provide for the Canadian market. When you start to look at things like steel and aluminum you quickly learn that well there's actually a lot of different products and they may need to pivot to new markets whether those are in Canada or outside of Canada and that could involve some restructuring. They'll need some new capital. They may need some new skills. I think more broadly, whether you've been hit by tariffs or not, the US, our trade relationship with the United States is fundamentally changed and what you're seeing is that businesses, even if they are CUSMA compliant and are exporting to the United States, they're looking for new markets, new suppliers. The government, the prime minister has been traveling around the world looking to open up new opportunities for trade and investment in Canada. Businesses are looking for those new opportunities. So it's a combination of all those things including opening up and reducing the trade restrictions within our country to grow the internal market, diversifying to others and then reallocating capital and in some case jobs to seize those new opportunities. And I guess what I would stress is that that is going to take some time. That is not something that happens quickly. And through that transition it does lower the economy's potential growth as that adjustment advances. Productivity growth should come back up. The economy should be stronger, more resilient. That is going to take some time and we have a two-year projection. It's happening through that whole two years.

Well, I think there's a few things. I think there's a sense that geopolitical risks are heightened. I'm not going to go through every event, but the month of January has been pretty packed with new elements, new geopolitical risks. I think US trade policy, there was through the last spring some very big changes, some pauses, some reintroduction, some deals. Through the summer, I don't want to say uncertainty was low but there was, you saw a little more stability. I think recently you've seen more unpredictability in US policy with all sorts of threats including on Canada. So US trade policy remains highly unpredictable. And then I think CUSMA is coming more into focus. It's now 2026. It is currently under review this year. So those are really the key elements that have increased uncertainty.

Well, to get back to the previous question, yes I think the threat to independence of the central bank in the United States is one thing that has been contributing to this sense of uncertainty. Look, why did I make a point of commenting on Chairman Powell and the US Fed? Look, the simple reason is the US Federal Reserve is the biggest, most important central bank in the world and we all need it to work well. A loss of independence of the Fed would affect us all. And for Canada, our financial markets are particularly integrated with the United States. So, it would particularly affect us. You know, it's hard to predict exactly what this would look like, but keeping the Fed operating independently, it's good for Americans, it's good for Canadians. And let me just expand a little bit on that. It's not independence for independence sake. What does independence do? It provides central banks with the space to take difficult decisions that benefit the economy, benefit the citizens of that country over the medium term. And the historical record is very clear. Central banks with operational independence for monetary policy do a better job of delivering price stability for their citizens. Under Fed Chairman Powell's leadership, he is doing a good job at leading the Fed based on evidence, based on facts, based on the best economic judgments of the FOMC. I hope it stays that way, that's going to be important for everyone.

The bottom line is it's too early to tell, Greg. It's too early to tell in our economy. These things feed through gradually. I think particularly over the last year, I think businesses both in the US and outside the US, I think we were all surprised by the initial announcements of US trade policy and I think there's been a period of time where businesses are waiting to see what actually shakes out and the constant changes, the constant announcements, the threats, the rollbacks. I mean if you're a business you're kind of waiting to see where things level out. So I think you're going to need to wait to see what the long-term impact of these policies are. You've also got other things going on in the US that are affecting the economy. There's this big investment in AI that's driving a lot of growth. So, you kind of have to separate what's driving the growth and what might be holding it back.

I mean, I don't think we've got a big change in the comments we've given you in the past on this, Eric. This is a big year for mortgage rollovers. I think it's the biggest year in decades in terms of the number of mortgages that are rolling over. We do expect those rollovers to see payment increases in large part because a lot of them were taken out in a very low rate environment. The recent sort of uptick in the yield curve will maybe marginally add to that payment increase, but most mortgagers have been preparing for this payment increase for a long time. The fact that rates have come down has meant those payment increases will be smaller. But we'll continue to watch it.

Yeah, I think you basically got it. I mean, if you look at, we published these charts several times, here's the Canadian outlook without tariffs. Here's with US tariffs and you see the reality is there's more trade friction, the economy works less efficiently and that puts the economy on a permanently lower path. Now you can, on that yes it's lower but how much lower it is going to depend on how much you restructure as you adapt, as you diversify your trade, as you develop new markets. You could certainly, I mean there's estimates that suggest that you could offset the US tariffs if we completely opened our internal trade so there are things you can do. We'll see exactly where we end up, but it's pretty clear that the days of open rules-based trade with the United States are over. We need to get on and adjust to that. We'll be better off if we adjust than if we don't. But clearly the end of rules-based open trade with the United States is not a good thing. It's not a good thing for Americans. It's not a good thing for Canadians.