Monetary Policy Report—January 2026—Canadian economy
US tariffs remain elevated. The future of trade in North America continues to be highly uncertain.
US tariffs on countries around the world are higher than they were in early 2025 (Chart 10). Economic uncertainty in Canada remains elevated, particularly because the future of the Canada-United States-Mexico Agreement continues to be unclear. Most assumptions made in the projection are in line with those in the October Report.
Tariff assumptions
The projection is based on tariffs in place or officially agreed on as of January 23, 2026 (Table 1).1 The outlook includes the impact of Canada’s preliminary agreement with China, which lowers Chinese tariffs on Canadian canola and allows a limited number of Chinese electric vehicles to be imported into Canada at a reduced tariff rate.2
| Before 2025 | July 2025 | October 2025 | January 2026 | |
|---|---|---|---|---|
| US tariff rate on Canada | 0.1 | 4.4 | 5.9 | 5.8 |
| Canadian tariff rate on the United States* | 0.0 | 2.6 | 1.0 | 1.2 |
* These tariff rates include the impact of Canadian tariff remissions.
Other assumptions
The projection is also conditional on several other assumptions.
- Potential output growth in Canada for 2025 is revised up to 2.3% from 1.6% in the October Report, mainly because of historical revisions to the data for gross domestic product (GDP) (see Canadian outlook in the Projections section). Potential output growth is expected to slow to around 1% over the projection horizon.
- An assumed slowdown in population growth and labour productivity is expected to weigh on potential output growth in Canada:
- The rate of population growth of people aged 15 and over slows from 3.3% in 2024 to 1.4% in 2025. It is then assumed to slow further to around 0.2% in 2026 before rising to 0.4% in 2027.
- Tariffs and trade tensions are assumed to weigh on total factor productivity and investment, reducing the level of potential output by 0.9% in 2027.
- For comparison, global potential output in 2027 is 0.2% lower due to tariffs and trade tensions.
- The impact of trade policy uncertainty on GDP is assumed to slowly decrease in 2026.
- In Canada, some tariff revenues are remitted back to affected businesses. All remaining revenues are redistributed to households.
- In all other countries, half of the revenues from tariffs are redistributed to households, while the rest are added to government revenues.
- In all countries, three-quarters of the increased costs from tariffs are passed on to consumer prices within six quarters.
- The projection for Canada incorporates information from the latest federal budget and provincial fiscal updates that have been tabled at the time of writing.
- Over the projection horizon, the per-barrel prices for oil are assumed to be US$60 for Brent, US$55 for West Texas Intermediate and US$45 for Western Canadian Select. These prices are $5 lower than assumed in the October Report.
- The Canadian dollar is assumed to average 72 cents US over the projection horizon, unchanged from the October Report.
- The nominal neutral interest rate in Canada is assumed to be in the estimated range of 2.25% to 3.25%.
Endnotes
- 1. For more details on calculating average tariff rates, see Bank of Canada, “How the average tariff rates are calculated,” Monetary Policy Report—October 2025.[←]
- 2. Chinese tariffs on imports of Canadian canola seed are scheduled to be cut from a combined rate of about 84% to about 15%. Canadian tariffs on imports of Chinese electric vehicles are expected to be cut from 100% to 6.1% for the first 49,000 vehicles imported. For more information, see Government of Canada, “Backgrounder — Preliminary Agreement-In-Principle to Address Economic and Trade Issues between Canada and the People’s Republic of China” (last modified January 17, 2026).[←]