Bank of Canada Set to Pause Interest Rates Amid Trade Uncertainty

2026-01-27 economy

Ottawa, Monday, 26 January 2026.
Policymakers are poised to hold rates at 2.25% Wednesday, with 75% of economists predicting a year-long pause as US trade negotiations cast a shadow over Canada’s economic growth.

Markets Bet on Stability

Financial markets have priced in a near-certainty that the Bank of Canada (BoC) will maintain the status quo this week. As of Monday morning, market odds indicate a nearly 90% probability that the central bank will hold its policy interest rate at 2.25% [2]. This consensus is mirrored by the broader economic community; a recent poll reveals that 75% of 35 economists surveyed expect the overnight rate to remain unchanged not just on Wednesday, but throughout the entirety of 2026 [1][5]. This marks a significant shift in expectations, rising from just over 60% in December 2025, as forecasters increasingly view the current rate as the new baseline for the year [1].

The Neutral Zone

The decision, scheduled for announcement on Wednesday, January 28, represents a continuation of the pause in monetary policy adjustments following the aggressive easing cycle of 2025 [1][6][7]. Governor Tiff Macklem has previously signaled that the current rate of 2.25% is “about the right level” to balance lingering inflationary pressures against a turbulent economy [2]. Doug Porter, chief economist at BMO Capital Markets, reinforces this view, noting that the economy is currently situated in the “zone of what the bank thinks to be neutral,” suggesting that the urgency for further cuts has dissipated despite some softening in economic data [3][5].

Trade Uncertainty Clouds the Horizon

While domestic numbers suggest stability, the primary driver for the Bank’s caution lies beyond Canada’s borders. The looming renegotiation of the United States-Mexico-Canada Agreement (USMCA) and potential U.S. tariffs have introduced a layer of structural uncertainty that monetary policy is ill-equipped to address directly [1][5]. Avery Shenfeld, chief economist at CIBC, identifies trade as “by far… the biggest cloud on the horizon,” warning that worsening trade barriers could eventually force the BoC to abandon its neutral stance and ease rates further to cushion the economic blow [2]. For now, however, the central bank appears content to wait and assess how these geopolitical dynamics unfold before altering its course [5].

Domestic Economic Indicators

Domestically, the economic picture remains mixed, supporting the argument for a policy hold. Inflation remains largely in check, with the Consumer Price Index (CPI) rising 2.4% year-over-year in December 2025 [2][4]. However, the labor market is showing signs of slack; the unemployment rate climbed to 6.8% in December, a level that some economists argue is “too high for comfort” [2][5]. Furthermore, business sentiment is reported as soft, with companies expressing concern over trade tensions, while consumers remain anxious regarding job security and debt repayment [1][3]. Despite these headwinds, the economy has avoided a sharp downturn, with solid job creation recorded between September and November of last year [3][5].

Housing and Borrowing Costs

For Canadian borrowers, the expected rate hold implies that the prime rate will remain at 4.45% [4]. The housing market has shown sensitivity to these borrowing costs, with home sales decreasing by 4.5% in December 2025 compared to the previous year [4]. Despite this recent cooling, the Canadian Real Estate Association (CREA) projects a rebound, forecasting that national home sales will rise by 5.1% in 2026 to approximately 494,500 transactions [4]. This anticipated recovery suggests that while rates are not decreasing, the market may be adjusting to the current cost of borrowing.

Future Outlook

Looking ahead, the path for 2026 appears to be one of watchful waiting. Tony Stillo, director of Canada Economics at Oxford Economics, suggests that rates will likely remain on hold for about a year before a slight increase moves the policy rate back toward a neutral midpoint [1][3]. With the Bank of Canada set to release its quarterly Monetary Policy Report alongside the rate decision on Wednesday, observers will be keen to see how policymakers weigh the immediate stability of the “neutral zone” against the unpredictable risks of global trade friction [1][7].

Sources

Monetary Policy Interest Rates