Bank of Canada (BOC): Policy Rate Expected to Remain Unchanged for Now

■ The Bank of Canada (BOC) believes that geopolitical instability, the reconsideration of the CUSMA, and trade disruptions will pose both upward and downward risks to inflation.  

■ The Bank expects the CPI to remain near the central bank's target during the forecast period to 2027.  

  On January 11, the Bank of Canada (BOC) released the minutes of its monetary policy meeting held on January 28. At the meeting, the policy rate was kept unchanged at 2.25% for the second consecutive time, and the current interest rate level was deemed appropriate based on the current economic outlook. BOC members stated that the overall trend of the Canadian economy since October last year has been largely in line with expectations. However, the meeting focused on the following three risks: (1) geopolitical instability, (2) the reconsideration of the Canada-Mexico-Canada Agreement (CUSMA), and (3) the economy's adjustment to trade disruptions. The central bank believes that the rising geopolitical risks caused by the US government and the potential threat to the independence of the Federal Reserve (FRB) have made the global environment more unstable and rekindled uncertainty. US trade policy has become more unpredictable, and this tension could disrupt global supply chains, weaken supply capacity, and drag down economic activity, thus posing both upward and downward risks to inflation. 

 
Regarding the reassessment of CUSMA, the Bank of Canada noted that businesses are likely to remain cautious about capital expenditures until the outlook for Canada-US trade relations becomes clearer. While measures to reduce reliance on US trade may support long-term export growth and investment, the Policy Committee unanimously agreed that this would pose downside risks to economic growth. A slowdown in the economy could depress inflation, but rising import costs, potential retaliatory tariffs, and supply chain disruptions could also push inflation higher. The Bank of Canada ultimately determined that the risks to the inflation outlook have increased, but expects the Consumer Price Index (CPI) to remain near the Bank's 2% target over the forecast period to 2027. 
 
The CPI rose 2.4% year-on-year in December, primarily due to the base effect of the previous year's tax credits (GST/HST exemption). However, the BOC considers the trimmed mean CPI (2.7% year-over-year) and median CPI (2.5% year-over-year), which reflect underlying inflation trends, to be trending downward. In the short-term financial market, although a few opinions predict that interest rates may be raised in October and December, if the January CPI released on the 16th is still within the central bank's target range (1%-3%), the mainstream market expectation that the BOC will maintain the policy rate at 2.25% before the end of the year is unlikely to be shaken.