Policy on Hold as Governing Council Sees Rates at "Lower End of Neutral"

The Bank of Canada has released the minutes from its December 10, 2025, Governing Council meeting, revealing a unanimous decision to maintain the policy interest rate at 2.25%. This follows a total of 100 basis points in cuts earlier in the year. Officials judged the current setting as "appropriate" and positioned at the lower end of the neutral rate, a level they believe supports economic growth while keeping inflation contained.

Resilient Growth Meets Softening Momentum

The Canadian economy entered 2025 on firmer footing than previously estimated, thanks to significant upward revisions to GDP data. Third-quarter growth came in at a robust 2.6%, primarily driven by a surprising drop in imports rather than domestic strength. However, the Council expects fourth-quarter growth to soften, with housing, consumption, and government spending likely offsetting continued weakness in exports and business investment.

"Final domestic demand was flat, revealing underlying weakness in business investment and household consumption," the minutes noted, highlighting the mixed nature of the recovery.

Labour Market Shows Tentative Improvement

Recent employment data provided some encouragement, with the unemployment rate falling to 6.5% in November. Yet, signals remain mixed:

  • Job gains have been concentrated in part-time employment.
  • While trade-exposed sectors have stabilized, activity remains at lower levels.
  • Job vacancies are low, and business hiring intentions are subdued.

Inflation Nears Target, With Near-Term Noise Expected

Inflation continues to trend toward the Bank's 2% target. Headline CPI eased to 2.2% in October, while core measures sit between 2.5% and 3%, with underlying inflation estimated near 2.5%.

The Governing Council anticipates a near-term uptick in CPI due to base effects from last year's GST/HST holiday, but the medium-term outlook remains unchanged. They expect core inflation to ease gradually, with economic slack helping to offset potential cost pressures from trade disruptions.

Elevated Uncertainty Dictates Cautious, Data-Dependent Stance

The minutes repeatedly emphasized high uncertainty, primarily driven by risks surrounding the CUSMA trade agreement review and a broader global trade reconfiguration. This uncertainty is heavily weighing on corporate decision-making and investment.

Consequently, the Governing Council stated there is "no clear bias" toward the next policy move. The path and timing of any future rate changes will remain fully data-dependent. Officials affirmed they are "prepared to respond if incoming data materially diverges from the outlook."

The Bottom Line: Steady as She Goes

The Bank of Canada's message is one of cautious stability. While the economy shows resilience and inflation is broadly on track, elevated trade-related uncertainty requires policy to remain firmly on hold. The Bank is preserving its flexibility as Canada navigates significant structural changes in the global trade landscape.