Bank of Canada Should Hold Overnight Rate Target at 2.25 Percent over the Coming Year, Says C.D. Howe Institute Monetary Policy Council

December 4, 2025 – The C.D. Howe Institute’s Monetary Policy Council (MPC) calls for the Bank of Canada to keep its target for the overnight rate, its benchmark policy interest rate, at 2.25 percent at its next announcement on December 10, and maintain it at that level over the next year.

The MPC, chaired at this meeting by William B.P. Robson, the Institute’s President and CEO, includes the chief economists of the six largest Canadian banks, alongside six leading academic economists and financial market experts.

Acting as a shadow Bank of Canada Governing Council, the MPC provides an independent assessment of the monetary stance needed to support the Bank’s 2-percent inflation target. Its formal recommendation for each interest rate announcement is the median vote of members in attendance. Members vote on the upcoming announcement, the subsequent announcement, and the announcements six months and one year ahead.

Eight of the nine MPC members attending the meeting called for the Bank of Canada to hold the overnight rate target at 2.25 next week, while one called for a cut to 2.00 percent. Looking ahead to January 2026, eight members called for a target of 2.25 percent, while the member who called for a cut next week called for a further cut to 1.75 percent. Looking ahead six months, to June 2026, seven members called for a target of 2.25 percent, one for a target of 2.00 percent, and one for a target of 1.75. In a year’s time, six members called for 2.25, two called for 2.00, and one called for a higher target of 2.75 percent (see table below).

The number of recommendations for an overnight rate target at its current level in the near term and over the next year reflected a strong feeling in the group that indicators of growth, inflation, financial conditions and sentiment had, on balance, created no compelling evidence for a change in policy since the Bank’s last announcement in October. While the world economy has suffered less from armed conflict and trade policy turmoil than many feared, growth abroad remains lacklustre. Available data suggest that the US economy is still growing, if less robustly. Canadian domestic demand is weak, suggesting that inflation will gradually move toward 2 percent. After some discussion of the pros and cons of the Bank of Canada lowering the overnight rate and then raising it again if growth turns out stronger and inflation higher than expected, most members felt that these circumstances justified keeping the overnight rate target where it is.

Data uncertainties affect all discussions of interest rate settings but loomed particularly large at this meeting. The revisions to Canada’s national accounts tell a story of faster growth in output, spending and productivity in the recent past, but the significance of the new data for monetary policy was unclear to the group.

Some members noted that faster growth of productive capacity and activity added up to no change in estimates of the disinflationary output gap; others noted that inflation running above 2 percent was evidence that the output gap was smaller than expected – a point underlined by members concerned about feeble business investment. Gaps in top-quality US data because of the government shutdown also featured in the conversation, particularly because lack of data on US imports made Canadian export data less reliable. Another focus of conversation was lack of good quality data about temporary residents in Canada and conflicting readings from Statistics Canada’s Survey of Employment, Payrolls and Hours and its Labour Force Survey.

Another point of discussion at this meeting was the possible impact of measures announced in the November federal budget for growth. While some members commented on the possibility of higher investment spending over time, and some thought that fiscal stimulus might boost growth enough to warrant a higher-than-otherwise overnight rate a year from now, others argued that the budget’s measures would not likely have any impact in 2026 or even in 2027.

The views and opinions expressed by the participants are their own and do not necessarily reflect the views of the organizations with which they are affiliated, or those of the C.D. Howe Institute. Forecasters’ recommendations may differ from their predictions.

The MPC’s next vote will take place on January 22, 2026, prior to the Bank of Canada’s overnight rate announcement on January 28.

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For more information, contact: Lauren Malyk, Manager, Communications, 416-873-6168, lmalyk@cdhowe.org.

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