Introduction to Canada’s Economic Outlook
The Bank of Canada is expected to keep its overnight interest rate on hold through 2026, according to a majority of economists polled by Reuters. This decision is based on the expectation that the economy will grow steadily with inflation largely contained.
Current Economic Situation
Canada’s job growth stalled in December after three straight monthly gains, pushing up the jobless rate. Inflation rose more than expected, although core measures fell. The risk of renewed trade tensions with the U.S., Canada’s top export destination, also argues for caution. The U.S.-Mexico-Canada Agreement (USMCA) is set to be reviewed in July, which may impact Canada’s economy.
Interest Rate Predictions
All 35 economists polled by Reuters predicted that the Bank of Canada will keep its key interest rate at 2.25% on January 28. Nearly 75% of economists forecast that the central bank will keep rates steady through 2026, representing a larger majority than the just over 60% who expected that outcome in December.
Economic Growth Expectations
Canada’s economy is expected to have slowed sharply to an annualized pace of only 0.3% last quarter, after growing 2.6% in the third quarter. However, the economy is expected to gradually pick up pace to hit about a 2% rate of growth by the end of 2026. Growth will average 1.2% and 1.8% in 2026 and 2027, respectively, after a 1.7% rise last year.
Inflation Forecast
Canada’s inflation is forecast to remain around the midpoint of the Bank of Canada’s 1%-3% target range. The Bank of Canada cut rates by 275 basis points between June 2024 and October 2025, making it one of the most aggressive central banks among its G10 peers.
Expert Insights
According to Avery Shenfeld, chief economist at CIBC Capital Markets, "At this point, the Bank of Canada is ready to take a fairly long wait-and-see stance. If there’s a risk of a move, it’s more likely to be a cut than a hike this year." Shenfeld also noted that there is still a lot of slack in the labor market and a fair degree of uncertainty over the pace of the expansion this year.
Conclusion
In conclusion, the Bank of Canada is expected to keep its overnight interest rate on hold through 2026, as the economy is expected to grow steadily with inflation largely contained. The economy is expected to pick up pace by the end of 2026, with growth averaging 1.2% and 1.8% in 2026 and 2027, respectively. Canada’s inflation is forecast to remain around the midpoint of the Bank of Canada’s target range, and the Bank of Canada is ready to take a wait-and-see stance, with a possible cut in interest rates if needed.
