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Canada: Trade Risk and Rate Flexibility

• The Bank of Canada held rates at 2.25%, as expected, with this second straight hold signalling a cautious pause as policy is firmly data‑dependent.
• With core inflation easing but still near 2.5% and unemployment elevated, rates are likely on hold through 2026 unless inflation or growth deviates materially.
• Trade uncertainty and CUSMA talks are key wildcards; the next move (probably a hike) is seen in 2027 if growth and inflation remain near projections.

Monetary Policy Tide Is Turning Up

• Markets are already pricing the return of rate hikes in 2026 for Canada, Australia and New Zealand, while policymakers elsewhere are starting to warn of the possibility.
• Transitional support to structural adjustments needs unwinding, as Canada signals most prominently. Broader activity resilience and inflation reveal the risk of overstimulation.
• The BoE already committed a policy mistake by easing too early, and is split by those recognising the persistent danger. Market pricing remains too dovish for 2026.

By Philip Rush

BoC: Structural Pause at 2.25%

• The BoC held the policy rate at 2.25%, matching the consensus, and framed this as a pause near neutral that likely extends the horizon for stable rates.​
• Strong but trade‑driven Q3 growth and still‑soft domestic demand argue against near‑term hikes, keeping the bias toward a prolonged hold rather than renewed easing.​
• With CPI near 2% and core around 2.5%, the Bank sees inflation anchored, reducing pressure for further cuts and reinforcing a data‑dependent, higher‑for‑longer rate stance.​

BoC Cuts to 2.25%: End or Pause?

• The Bank of Canada cut its policy rate by 25bp to 2.25%, matching the consensus, and signals the current rate is about right to sustain 2% inflation.
• Structural damage from tariffs limits further monetary easing. Fiscal policy is expected to carry the economic support burden ahead.
• Economists are divided: some see the cycle complete at 2.25%, others forecast further cuts to 1.75-2.0% if growth disappoints materially.