By Paul Vieira
OTTAWA--Senior Bank of Canada policymakers identified the pending U.S.-led review of the existing North American trade treaty as an "important risk" to the economic outlook, according to minutes published Wednesday.
The seven members of the central bank's governing council, led by Gov. Tiff Macklem, said the risks to the outlook have moved higher, given renewed geopolitical tensions and elevated uncertainty over Trump administration trade policy.
Senior officials "agreed that holding the policy interest rate at its current level was conditional on the economy evolving in line with their outlook," according to the minutes, which covered deliberations starting Jan. 20 toward the Jan. 28 policy decision, which kept the benchmark interest rate unchanged at 2.25%.
As a result, "it was difficult to predict the timing and direction of the next change in the policy rate," according to the minutes.
Most economists and market participants expect the Bank of Canada to keep its main interest rate unchanged through 2026, with rate increases starting in the second quarter of 2027. Macklem said last week that additional rate cuts won't necessarily help an economy under pressure from trade friction with Washington, advances in artificial intelligence and lower population growth. Analysts interpreted those remarks as Macklem setting a high bar for additional rate relief.
Royce Mendes, head of macro strategy at Desjardins Capital Markets, said the minutes leave the door slightly open for the possibility of another rate cut. "Conflicting economic data and uncertainty surrounding [trade] have translated into an extremely clouded outlook for interest rates," he said in a note to clients. He added the minutes emphasized that senior officials want to keep all options available. "That appears to suggest there's at least a slightly lower bar for further rate cuts."
Central bank officials have said the policy rate, at 2.25%, is at a level that provides some stimulus to the economy while guarding against upward inflation risks stemming from hefty U.S. tariffs. Officials described the rate level as "on the stimulative side" of the central bank's estimated range for the neutral rate--or when policy neither adds nor subtracts from economic activity.
According to the minutes, senior officials identified the upcoming review of the U.S.-Mexico-Canada trade pact, or USMCA, as an "important risk to the outlook." That review, led by the Trump administration, is expected to move into high gear this summer. Early 2026 has been marked by an escalation of trade tensions between Washington and Ottawa.
This week, President Trump threatened to block the opening of a new bridge connecting Detroit and Windsor, Ontario. U.S. Trade Representative Jameson Greer told Fox Business that Canada was pursuing policies that would make USMCA's review a more difficult process.
According to the minutes, central-bank officials said business investment would remain weak, in part because executives didn't want to deploy cash until there was greater certainty about USMCA's future. "Overall, members agreed that the USMCA review posed a downside risk to economic growth," the minutes said.
About 80% of Canada's exports to the U.S. arrive duty free, because they comply with the trade deal's terms. Trade analysts and former officials believe the U.S. will push Canada for more concessions, in areas such as agriculture and digital policies, to keep the agreement intact.
The U.S. has also criticized a recent pact Canada reached with America's biggest rival, China. Under that deal, Canada agreed to sharply lower tariffs on some China-made electric vehicles in exchange for lower Chinese duties on Canadian agricultural goods.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
02-11-26 1500ET
