Balancing act: Canada holds while the U.S. cuts interest rates to close the year

Wesley Blight

December 10, 2025

Key takeaways

The Bank of Canada decided to hold its policy rate at 2.25% in its December monetary policy meeting.
The target for the U.S. federal funds rate was cut by another 0.25% and is now 3.5-to-3.75%.
We maintain our overall positive view on equities relative to fixed income and cash.

Ending its run of cuts, the Bank of Canada (BoC) decided to hold its benchmark interest rate at 2.25% at its final monetary policy meeting of 2025. South of the border, the U.S. Federal Reserve (Fed) decided to make it three consecutive cuts, bringing its target policy rate to 3.5-to-3.75%. Both outcomes were widely expected given recent economic developments.

Canadian economic indicators improve despite uncertainties

The BoC cited positive economic data to support its decision on Wednesday. The Canadian economy surprised by growing a robust 2.6% in the third quarter. This good news was tempered by the Bank’s own expectations—as a reminder, from its October Monetary Policy Report, the BoC expects the Canadian economy to grow 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027, as uncertainty remains high and trade developments can lead to more volatility.

Employment was also notably stronger over the past three months, with unemployment dropping to 6.5% in November. However, the job market in trade-sensitive areas remains weak while intentions to hire remains lukewarm. Next, Consumer Price Index (CPI) inflation slowed to 2.2% in October. While the BoC expects CPI inflation to rise slightly due to the effects of 2024’s GST/HST break, it still expects readings to remain close to its 2% target.

“If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment,” summarized the Bank. At this time, we are aligned with the BoC’s expectations and believe it is done cutting rates in the near term. Further out, the outlook is less clear, with some economists expecting an extended hold, others expecting cuts and some projecting rate hikes.

Decision was not unanimous as the fed cuts again

U.S. growth remains relatively strong, but uncertainty remains elevated as employment and inflation continue to be concerns. In its latest Summary of Economic Projections, growth was modestly revised upwards in the near term—1.7% for 2025 (up from 1.6% in September), 2.3% for 2026 (up from 1.8%), 2.0% for 2027 (up from 1.9%) and 1.9% for 2028 (up from 1.8%). Inflation was also modestly revised down in the near term.

Summarized by the Fed, “Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.”

Unsurprisingly, there continues to be dissent within the Federal Open Market Committee—with two voting members preferring no change while another preferring a deeper 0.5% cut instead. As part of its forward guidance, the Fed did signal that the pace of easing will slow with one projected 0.25% cut in 2026. While we agree that the benchmark U.S. rate will head lower, we believe more than one 0.25% cut is likely.

We remain net positive on equities overall

We continue to hold a positive view on equities as the environment remains supportive of risk-on assets like stocks. We have a modestly bullish 12-to-18-month outlook, and we remain tactically overweight equities relative to fixed income and cash in our portfolios with a tactical asset allocation overlay.

The global economy remains resilient and continues to adapt to fluctuating trade dynamics. Furthermore, policy remains accommodative and economic indicators continue to show improvements. Central banks also maintain room to cut rates further if needed.

While risks continue to ease, they remain. Market concentration in the U.S. continues to be concerning, but there are signs that mega cap innovation is supporting a broad range of other businesses.

While we believe equities offer greater upside potential versus fixed income, our outlook for fixed income remains positive, nonetheless. While bond prices have recently faced some pressure as yields have risen, the higher yields present a more attractive income opportunity for investors.

As always, to determine the best course of action when positioning your portfolio for long-term success, we will continue to monitor the evolving economic and market landscape.

The BoC and the Fed will both kick off 2026 with interest rate announcements on January 28^th. The BoC’s announcement will be accompanied by an updated Monetary Policy Report.

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is Vice President and Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.

View legal footnotes

Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer; their values change frequently, and past performance may not be repeated.

This publication is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this document, including information relating to interest rates, market conditions, tax rules, and other investment factors, are subject to change without notice, and The Bank of Nova Scotia is not responsible to update this information. All third-party sources are believed to be accurate and reliable as of the date of publication, and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information. This publication may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia.

To the extent this document contains information or data obtained from third party sources, it is believed to be accurate and reliable as of the date of publication, but Scotia Global Asset Management does not guarantee its accuracy or reliability.

Scotia Global Asset Management is a business name used by 1832 Asset Management L.P., a limited partnership, the general partner of which is wholly owned by Scotiabank.

Scotiabank® includes The Bank of Nova Scotia and its subsidiaries and affiliates, including 1832 Asset Management L.P. and Scotia Securities Inc.

ScotiaFunds® are managed by Scotia Global Asset Management. ScotiaFunds are available through Scotia Securities Inc. and from other dealers and advisors. Scotia Securities Inc. is wholly owned by The Bank of Nova Scotia and is a member of the Canadian Investment Regulatory Organization.

® Registered trademarks of The Bank of Nova Scotia, used under licence.