A cyclist rides past the Bank of Canada building in Ottawa, Ontario, Canada May 8, 2025. REUTERS/Blair Gable
FILE PHOTO: Bank of Canada Governor Tiff Macklem takes part in a press conference, after cutting key interest rate, in Ottawa, Ontario, Canada September 17, 2025. REUTERS/Blair Gable/File Photo

By Promit Mukherjee and David Ljunggren

OTTAWA, Dec 10 (Reuters) - The Bank of Canada held its key policy rate steady at 2.25% on Wednesday as widely expected, and Governor Tiff Macklem said the economy was proving resilient overall to the effect of U.S. trade measures.

Despite tariffs between 25% and 50% on some critical sectors such as cars, lumber, aluminum and steel, Canada's economy has shown signs of strength.

Third quarter annualized GDP grew by 2.6%, much more than expected, while employment data showed the economy added 181,000 new jobs between September and November.

"It's been a difficult year for Canadians and Canadian businesses. But as the year is closing, it's looking better than it looked in the spring, in the summer," Macklem said during a press conference after the rates decision.

Macklem said the impact of tariffs has not totally spilled over into the broader economy.

Uncertainty remains high and if the outlook changes, the bank is ready to respond, Macklem said, reiterating comments he made when the bank cut rates in October to their current level.

"Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy," said Macklem.

The U.S. Federal Reserve will also announce a rate decision on Wednesday and a majority of economists expect it will cut rates by 25 basis points.

Macklem said even though the economy had shown some resilience, he expected GDP growth to be weak in the fourth quarter and hiring intentions to be muted.

While the economy is adjusting to tariffs, volatility in trade and quarterly GDP numbers are making it more difficult to assess the underlying momentum of the economy, Macklem noted.

The recent data has "not changed our view that GDP will expand at a moderate pace in 2026 and inflation will remain close to target."

Andrew Kelvin, Head of Canadian and Global Rates Strategy at TD Securities called the bank's commentary a fairly cautious tone.

"It leads me to be very comfortable with the idea that the bank will be on hold for quite some time," he said.

CHOPPINESS IN INFLATION

The consumer price index eased to 2.2% in October but economists have regularly flagged that measures of core inflation, which strips out volatile components, have stayed around 3%, the top end of the BoC's inflation target.

In the months ahead, the BoC expects some choppiness in headline inflation which would push inflation temporarily higher in the near term.

Senior Deputy Governor Carolyn Rogers acknowledged that while inflation had largely stayed at around 2%, Canadians have struggled with affordability, especially due to high food and shelter costs.

"So what we need to do is keep inflation at target and support the structural shift that the economy is going through," she said.

But Macklem said the ongoing economic slack would roughly offset these cost pressures. He said the bank expects the growth in final domestic demand to resume after registering a flat growth in the third quarter.

The Canadian dollar weakened after the announcement and was trading down 0.13% to 1.3865 to the U.S. dollar, or 72.12 U.S. cents. Yields on the two-year government bonds fell 3.3 basis points to 2.556%.

(Reporting by Promit Mukherjee and David LjunggrenAdditional reporting by Nivedita Balu, Fergal Smith and Nick Zieminski)