The Bank of Canada’s Governing Council said the upcoming re-negotiation of the United States-Mexico-Canada Agreement (USMCA) poses a threat to the accuracy of its economic and inflation outlook for 2026.
“On trade policy, members agreed that the upcoming review of USMCA was a significant risk,” said a document summarizing the governing council’s most recent deliberations prior to the Dec. 10 interest rate decision, where the Bank kept its key interest rate at 2.25 percent.
The Dec. 23 document said there is “uncertainty” leading up to the negotiations in 2026, which will likely weigh on business investment in Canada. The council members said they had heard from business leaders concerned with the future of the USMCA and how it would impact their businesses.
The governing council said a “worst-case scenario” would involve the dissolution of the USMCA and higher tariffs on Canada. However, a resolution of USMCA that provided clarity and stability around North American trade policy “could spur on business investment” in Canada.
Members of the governing council also said they believe the current policy rate of 2.25 percent is at the right level to keep inflation near 2 percent while helping Canada’s economy grow. However, the members said amid the high uncertainty around global trade, “it was difficult to predict when and in which direction the next change in the policy rate would be.”
“If a significant new shock were to materialize, or an accumulation of evidence indicated that the evolution of economic activity and inflation was materially different from what they expected, governing council was prepared to respond,” the readout said.
The United States placed a series of tariffs on Canada in 2025, including 50 percent tariffs on steel, aluminum, and copper; 25 percent tariffs on vehicles and auto parts; 10 percent tariffs on oil and potash; and 25 percent tariffs on Canadian exports not covered under the United States-Mexico-Canada Agreement, which were increased to 35 percent in August.
U.S. President Donald Trump said on Dec. 8 he was also considering “very severe” additional tariffs on fertilizer imports from Canada in order to encourage the United States to produce its own fertilizer.
Trump ended trade negotiations between Washington and Ottawa in October because of an ad campaign by the Ontario government that he said misrepresented former U.S. President Ronald Reagan’s stance on tariffs. He also announced days later that he would raise tariffs on Canada by an additional 10 percent because the “fraudulent” ad was not immediately pulled, but this has not yet happened.
With the USMCA set to be re-negotiated in 2026, there remains uncertainty about how this will play out. U.S. Trade Representative Jamieson Greer said on Dec. 10 that the Trump administration was considering breaking up USMCA into separate agreements with Canada and Mexico, as the United States has a “very different” economic relationship with the two countries.
Prime Minister Mark Carney said during a recent interview that while he thinks the USMCA will “change,” he does not think it is “necessarily in danger.” The prime minister also added that he discussed the upcoming USMCA review with Trump and Mexican President Claudia Sheinbaum in Washington on the sidelines of the FIFA World Cup draw earlier this month, and there was no indication Trump planned to tear up the agreement.
