Bank of Canada Gov. Macklem Warns of Misdiagnosing Economic Weakness — Update

By Paul Vieira

OTTAWA--Further interest-rate cuts won't necessarily help an economy that's being pulled down by U.S. trade friction, advances in artificial intelligence and lower population growth, Bank of Canada Gov. Tiff Macklem said Thursday.

The Canadian economy is undergoing a profound structural shift, Macklem said. The central bank can help support the transition but it's ultimately the response from policymakers, business executives and households that will determine Canada's future prosperity, said the central banker, in prepared remarks set for delivery in Toronto.

"We can be victims of U.S. tariffs and AI disruption, or we can lean into structural change, expand our internal market, diversify our trade, embrace new technology and raise our productivity," Macklem said.

Last week, Macklem and other Bank of Canada senior officials left its benchmark interest rate unchanged, at 2.25%. It said its economic outlook was little changed from the fall although warned the level of uncertainty stemming from U.S. trade policy and geopolitical risks has ramped up.

His comments Thursday might reinforce a belief among analysts that the Bank of Canada is set for a prolonged hold at 2.75%, as it awaits the results of a U.S.-led review later this year of the current U.S.-Mexico-Canada trade treaty, or USMCA. Historically, about 20% of Canada's gross domestic product relies on two-way trade with the U.S. About 80% of Canadian exports arrive in the U.S. duty free as they comply with USMCA terms, highlighting the importance for Canada to keep the agreement intact.

In his speech, Macklem warned of years of modest growth ahead, as Canadian companies rewire their logistics networks to deal with U.S. trade policy and companies adopt AI to remain competitive. Growth is likely to average 1.5% over the next two years, he said. Rate cuts might not work in fueling increased activity, he added.

"We have to be careful not to misdiagnose economic weakness," Macklem said. "Monetary policy should not try to compensate for lost supply. Lowering interest rates in the face of weak economic activity risks stoking future inflation if the weakness is due to lower productive capacity rather than a cyclical downturn in demand."

He said the Bank of Canada will need to lean on "granular analysis" to understand how capital and labor are shifting across sectors and regions amid the upheaval. Rate policy "should not try to mitigate structural change," he said. "Our role is to preserve price stability while supporting the economy through the upheaval." Canada's central bank sets rate policy to achieve and maintain 2% inflation.

Macklem said he expects tepid job creation this year. Lower population growth -- due to government efforts to limit immigration and aging demographics -- will likely lead to limited expansion in the labor force. As a result, "we are not expecting the unemployment rate to trend higher," he said.

As for AI, Macklem said "significant adoption" by Canadian firms appears low. "It may be a while before we see a significant impact" on productivity from AI, Macklem said.

Write to Paul Vieira at paul.vieira@wsj.com

Corrections & Amplifications

This article was corrected at 1:38 p.m. ET because it incorrectly said the benchmark rate was 2.75%. The Bank of Canada left its benchmark interest rate unchanged at 2.25%.

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February 05, 2026 12:45 ET (17:45 GMT)