Economic resilience stronger than expected, Bank of Canada announces as scheduled to keep interest rates unchanged.

The Bank of Canada announced on Wednesday that it will maintain its benchmark interest rate at 2.25%. Recent data shows that the Canadian economy is more resilient than expected, but the Bank of Canada stated that the current interest rate level is still suitable for dealing with the pressures brought by the trade war, and will help stabilize inflation near the target level. This move to keep rates unchanged is in line with market expectations. Bank of Canada Governor Macklem stated that despite facing impacts from U.S. tariffs, the Canadian economy as a whole is "more resilient" and there is still some "slack in the economy," which will help keep inflation close to the target level of 2%. The Bank of Canada reiterated in its statement that the "current policy rate is broadly appropriate" and believes that maintaining rates at the "lower end of the neutral range" is appropriate. The Bank of Canada also emphasized that it is "prepared to take action as necessary" if there are changes in economic outlook. In terms of market reaction, the Canadian dollar weakened after the decision was announced, falling to a daily low against the U.S. dollar at 1.3860 CAD per 1 USD, a decrease of about 0.1%. Canadian bond yields fell across the board, with the 2-year bond yield dropping about 3 basis points to 2.66%. Recent Canadian economic data has been unexpectedly strong. In the past three months, the labor market added 181,000 jobs; and the annualized GDP growth rate for the third quarter reached 2.6%, significantly higher than expected. Macklem pointed out that the latest revisions to GDP for 2022-2024 indicate that Canada's economy was "healthier than previously thought" before the outbreak of trade conflicts, which may be one of the reasons for its greater resilience. However, he emphasized that these revisions do not imply a significant reduction in the output gap, but rather show that "demand and economic capacity are higher than previously expected." Despite the impact on the GDP trajectory, the Bank of Canada still expects the economy to expand at a moderate pace by 2026, with inflation remaining close to the target range. Overall, the Bank of Canada's stance indicates that it is "comfortable" maintaining stable rates, unless there are significant changes in growth and inflation. Charles St-Arnaud, Chief Economist at Servus Credit Union, noted, "The statement does not change our view that the Bank of Canada will maintain rates unchanged for a longer period. Moreover, it is very clear that a significant economic deterioration is required to trigger a rate cut." Macklem stated that the Bank of Canada will incorporate the first budget of Prime Minister Carney's government into its January forecasts, and expects that increased defense spending and investment plans will boost both "demand and supply" of the economy. The central bank also warned that the review of the North American trade agreement, ongoing adjustments from tariffs, and fluctuations in economic data make the outlook more uncertain. "Fluctuations in trade and quarterly GDP make it more difficult for us to assess the fundamental momentum of the economy." Regarding the labor market, the Bank of Canada noted that there are "some signs of improvement in recent job performance," including three consecutive months of strong job growth and a decrease in the unemployment rate. However, policymakers also pointed out that trade-sensitive industries are still weak, business recruiting intentions are low, and final domestic demand in the third quarter remains stagnant, driven only by trade fluctuations. Katherine Judge, economist at CIBC, stated in a report, "The Bank of Canada downplays the recent positive performance of data, emphasizing that the labor market has only shown partial improvement, while trade-sensitive industries are still under pressure and business hiring intentions remain weak."