 Unpacking interest rate uncertainty in 2025Harshbir Kaur and Rishi Vala No 2026-25, Staff Analytical Papers from Bank of Canada Abstract: Amid heightened Canada–US trade tensions in 2025, financial markets showed signs that investors had greater difficulty anticipating near-term Bank of Canada interest rate decisions. This uncertainty could have stemmed from two sources: uncertainty about the economic outlook or uncertainty about how the Bank of Canada would respond to that outlook. In assessing these sources, changes in the 2-year Government of Canada bond yield around the Bank of Canada's decisions remained in line with historical norms, suggesting that investors broadly understood the Bank of Canada's monetary policy response by the time decisions were announced. At the same time, the 2-year yield remained highly sensitive to incoming inflation and labour market data, indicating that these data releases continued to resolve uncertainty about the outlook. Taken together, the evidence suggests that the heightened uncertainty around Bank of Canada's interest rate decisions in 2025 was more consistent with an uncertain economic outlook than with an uncertain monetary policy response. Keywords: Financial markets and funds management; Market functioning; Models and tools; Econometric, statistical and computational methods; Monetary policy; Monetary policy framework and transmission (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsap:26-25 Access Statistics for this paper More papers in Staff Analytical Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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