The Bank of Canada is broadly anticipated to keep its policy interest rate unchanged at 2.25% when it announces its decision on Wednesday, although there is no consensus among economists and in money markets about where Canadian monetary policy will go later this year amid elevated economic uncertainty.
Since December, traders have begun to increase the odds of a rate increase toward the end of the year after an extended pause. Still, some economists remain on the other side of that view, pointing to the uncertain outcome of upcoming renegotiations of the United States-Mexico-Canada Agreement (USMCA) and the structural effects of existing tariffs as reasons for caution.
In October, after the Bank of Canada cut its policy rate by 25 basis points, the institution signalled that the policy rate was roughly at the right level while inflation remained inside the target range. At that time the bank also acknowledged it lacked tools to address the structural impacts being felt across parts of the economy as a result of U.S. tariffs and the related uncertainty.
A recent Reuters poll of economists found that nearly 75% of the 35 respondents expected the central bank to hold rates steady through 2026 - a higher share than the little over 60% who expressed the same view in December. Money markets, for their part, are pricing policy to remain on hold or to lean slightly toward easing through mid-2026, before shifting toward modest expectations for tightening in the final quarter of 2026.
Last year the BoC reduced its policy rate by a total of 100 basis points, bringing borrowing costs down to what it describes as the lower end of the neutral range - the policy band where rates neither stimulate nor restrict the economy. Some economists contend, however, that interest rates would need to decline further - below the neutral range - to be genuinely stimulative and provide clear support to growth.
"We are still in the zone of what the bank thinks to be neutral," said Doug Porter, chief economist at BMO Capital Markets. "If the unemployment rate is rising and we have a lot of trade uncertainty, why would rates just be neutral," he added, underscoring the view that worsening labour market or trade conditions could argue for a different policy stance.
The Bank of Canada's own survey of businesses and consumers found that corporate sentiment among Canadian companies remained subdued amid trade tensions, while households expressed concerns about job security and their ability to meet debt obligations. Despite these worries, broader economic indicators show that the direct impact of tariffs has been concentrated in specific sectors - notably steel, aluminum, lumber and the auto industry.
Outside those directly affected sectors, consumer prices have been largely stable, the economy has delivered modest growth, and job creation remained solid in the September-through-November period, according to the data cited by economists and central bank commentary.
Tony Stillo, director of Canada Economics at Oxford Economics, set out a cautious baseline: he expects the central bank to hold rates for roughly a year and then to lift them - not as the start of a prolonged tightening cycle, but to return the policy rate to the neutral midpoint. He emphasised that this scenario depends on a successful renegotiation of the USMCA, where tariffs would still be present but reduced in scope compared with current levels.
The Bank of Canada will deliver its monetary policy decision on January 29 at 9.45 a.m. ET (1345 GMT). Alongside the rate decision the bank will publish its quarterly Monetary Policy Report. The report will restore the central bank's prior practice of issuing single-point forecasts for economic growth and inflation and is expected to include an updated assessment of how the federal budget may affect the Canadian economy.
Key sections of the economy - including firms in steel, aluminum, lumber and the automotive supply chain - continue to face direct tariff impacts. Meanwhile, consumers and businesses report higher concern about employment and debt, even as headline inflation and aggregate job gains have shown resilience in recent months.