BOC Macklem: Given the current balance of risks, the policy rate is at the right level

5 key bullet points:

• BoC held the policy rate at 2.25%, judging it appropriate to keep inflation near 2% during a period of structural trade adjustment.

• US tariffs are hitting key sectors, but the overall Canadian economy remains more resilient than expected.

• CPI inflation stays contained near 2%, with core around 2½–3%, and temporary near-term volatility expected.

• Labour market shows modest improvement, though hiring intentions and trade-sensitive sectors remain weak.

• Elevated uncertainty—especially US trade policy and CUSMA review—means the BoC is prepared to respond if the outlook shifts.

Summary of Tiff Macklem’s Comments

• Policy rate held at 2.25%, with Governing Council judging it as appropriate to keep inflation near 2% while supporting the economy through a structural adjustment caused by US trade conflict.

• Three core messages:

  • Severe US tariffs have hit key Canadian sectors (autos, steel, aluminum, lumber), but the overall economy remains more resilient than expected.

  • Inflation pressures remain contained, with CPI near 2% for over a year and core measures in the 2½–3% range.

  • Given the current balance of risks, the policy rate is at the right level, though uncertainty is unusually high and the Bank is ready to respond if the outlook shifts.

• Revised GDP data show the economy entered 2025 healthier than previously thought, with stronger demand and capacity prior to the trade shock—helping explain current resilience.

• Recent economic performance is mixed: Q3 GDP surged 2.6% due to volatile trade, but final domestic demand was flat, and Q4 GDP is expected to be weak before growth improves in 2026.

• Labour market showing improvement, with three months of job gains and a drop in unemployment to 6.5%, though trade-sensitive sectors remain fragile and hiring intentions across the economy are soft.

• Inflation evolving largely as expected; headline CPI at 2.2%, with temporary volatility ahead due to last year’s GST/HST holiday. Underlying inflation remains around 2½%-3%, and economic slack should help keep CPI near target.

• Fiscal policy will add some support, with higher defence spending and investment incentives contributing to growth over time. Updated fiscal impacts will be incorporated into the January projection.

• Governing Council views the policy rate near the lower end of neutral as appropriate: accommodative enough to support adjustment, but consistent with containing inflation.

• Uncertainty remains elevated, especially around US trade policy and the upcoming CUSMA review, making it harder to judge underlying economic momentum due to volatility in trade flows and GDP.

• Macklem emphasized that Canada faces a structural transition, not just a cyclical slowdown. Trade frictions reduce economic efficiency and income, and monetary policy cannot restore lost supply, but it can help the economy adjust as long as inflation stays anchored near 2%.

The full opening statement from Macklem.

Opening statement

Tiff Macklem

Ottawa, Ontario

December 10, 2025

Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s monetary policy decision.

Today, Governing Council maintained the policy interest rate at 2.25%.

We have three main messages.

First, steep US tariffs on steel, aluminum, autos and lumber have hit these sectors hard, and uncertainty about US trade policy is weighing on business investment more broadly. But so far, the economy is proving resilient overall.

Second, inflationary pressures continue to be contained despite added costs related to the reconfiguration of trade. Total CPI inflation has been close to the 2% target for more than a year now, and we expect it to remain near the target.

Third, in the current situation, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. Nevertheless, uncertainty remains high and the range of possible outcomes is wider than usual. If the outlook changes, we are prepared to respond.

Let me expand on how we’re interpreting the new information we received since we published our October Monetary Policy Report.

In November, Statistics Canada published broad revisions to Canada’s economic growth numbers for 2022, 2023 and 2024. The revisions suggest the Canadian economy was healthier than we previously thought before we were hit by the US trade conflict. In particular, they suggest both demand and economic capacity were higher coming into this year. This may explain some of the resilience we’re seeing in more recent data.

After falling 1.8% in the second quarter due to sharply lower exports, Canadian GDP grew 2.6% in the third quarter. This was much stronger than we expected, but largely reflected volatility in trade. Final domestic demand was flat in the quarter. We expect growth in final domestic demand to resume, but with an anticipated decline in net exports, GDP growth is likely to be weak in the fourth quarter before picking up in 2026.

The labour market is showing some signs of improvement. After declining through the summer, employment has posted solid gains for the past three months and the unemployment rate has declined to 6.5% in November. Since the start of the year, there have been significant job losses in trade-sensitive sectors. But in recent months, employment in these sectors has been more stable, so gains in other sectors—particularly services—have boosted overall employment. Looking ahead, however, we’re seeing muted hiring intentions across the economy.

Inflation has evolved largely as expected. CPI inflation was 2.2% in October, and measures of core inflation remained in the range of 2½% to 3%. In the months ahead, we will see some choppiness in headline inflation, reflecting the temporary GST/HST holiday on some goods and services a year ago. This is likely to push inflation temporarily higher in the near term. Seeing through this choppiness, we expect ongoing economic slack to roughly offset cost pressures associated with the reconfiguration of trade, keeping CPI inflation close to the 2% target.

The recent federal budget includes increases in government spending, particularly in defence, and measures to increase public and private sector investment. It will take some time for the impact of these measures to be fully realized, and we expect they will contribute to growth in both demand and supply in the economy. As usual, we will incorporate updated fiscal measures from federal and provincial budgets in our next economic projection in January.

Taking all these developments into consideration, Governing Council assessed the stance of monetary policy. After cutting the policy interest rate in September and October, Governing Council had indicated that if inflation and economic activity were to evolve broadly in line with the October projection, the policy rate would be about right. While information since the last decision has affected the near-term dynamics of GDP growth, it has not changed our view that GDP will expand at a moderate pace in 2026 and inflation will remain close to target. Governing Council therefore decided to hold the policy rate unchanged. We agreed that a policy rate at the lower end of the neutral range was appropriate to provide some support for the economy as it works through this structural transition while keeping inflationary pressures contained.

Finally, Governing Council acknowledged that uncertainty remains elevated. This includes the unpredictability of US trade policy. In particular, the upcoming review of the Canada-United States-Mexico Agreement is creating uncertainty for many businesses. There is also uncertainty about how the Canadian economy will adjust to higher tariffs. The volatility we’re seeing in trade and quarterly GDP make it more difficult to assess the underlying momentum of the economy.

We will be assessing incoming data relative to our outlook. If a new shock or an accumulation of evidence materially change the outlook, we are prepared to respond.

Increased trade friction with the United States means our economy works less efficiently, with higher costs and less income. This is more than a cyclical downturn—it’s a structural transition. Monetary policy cannot restore lost supply. But it can help the economy adjust as long as inflation is well controlled. The Bank of Canada is focused on ensuring Canadians continue to have confidence in price stability through this period of global upheaval.

This article was written by Greg Michalowski at investinglive.com.