A year ago, the path forward for the Bank of Canada (BoC) looked relatively straightforward. Heading into 2025, economists largely agreed that interest rates were likely to be lower.
The core debate was how far and how fast cuts would come, but that clarity has since faded.
As 2026 approaches, economists, markets, and Canada’s largest banks are increasingly divided on whether the next move from Governor Tiff Macklem will be a rate cut, a hike, or an extended hold.
The shift reflects a Canadian economy that is underperforming, but not unravelling — and a policy environment dominated by trade uncertainty rather than inflation alone.
From clarity to convolution
At the end of 2024, Macklem described the threat of tariffs from newly re-elected U.S. President Donald Trump as “a major new uncertainty.”
One year later, Desjardins Group economists say the upcoming review of the Canada–United States–Mexico Agreement (CUSMA) is “the defining issue of 2026.”
What has changed most is where interest rates now sit.
After cutting rates by a cumulative 100 basis points in 2025, the Bank of Canada’s overnight rate stands at 2.25 per cent.
According to Indrani De, head of global investment research, and Robin Marshall, director of global investment research at FTSE Russell, that level is now at “the easy end” of the Bank’s neutral range. In this zone, policy is neither clearly stimulative nor restrictive.
“The debate about the next move in BoC rates is now two-way,” De and Marshall wrote in an email to Yahoo Finance Canada. “Both up and down.”
Weakened but not broken
That two-way debate reflects an economy that is growing below potential, but not sliding into recession. Most forecasters expect Canada’s real GDP to expand by roughly one to 1.5% in 2026, according to outlooks from Desjardins, BMO and National Bank of Canada.
While that is below Canada’s long-run trend, it remains well above contractionary territory.
Labour markets tell a similar story. Canada’s unemployment rate unexpectedly fell to 6.5% after a third consecutive consensus-beating jobs report, and third-quarter GDP data came in well above pessimistic forecasts.
Hiring remains weak, but layoffs are also subdued by a “low-hire, low-fire” dynamic, according to Indeed Canada economist Brendon Bernard.
Slower population growth has further limited upward pressure on unemployment. Indeed estimates that in a downside scenario tied to renewed trade disruption, the jobless rate could rise by about 0.4 percentage points, but its base case calls for only modest movement either way.
Trade uncertainty looms large
While economic data has been more resilient than feared, economists are nearly unanimous on one risk: Trade.
CUSMA exemptions shielded most Canadian exports in 2025, but Trump’s skepticism of the deal has raised concerns about its durability. BMO economists describe themselves as “relative pessimists,” warning the agreement could be subject to annual reviews rather than a permanent renewal.
“The tariff dynamic introduced in 2025, on-again, off-again, threatened and actual, is expected to continue in 2026,” Desjardins economist Randall Bartlett wrote in a Dec. 19 note. “In such a climate, businesses are likely to stay on the sidelines, reluctant to invest when the future is so unpredictable.”
With a July 1 deadline looming, Bartlett added that Canada’s post-review economic trajectory will depend heavily on whether an agreement is reached — “for good or for ill.”
FTSE Russell’s De and Marshall are somewhat less alarmed, arguing that global trade has proven more resilient than expected during previous rounds of U.S. trade conflict.
“This is a reason that U.S. trade policy uncertainty has had less downside impact broadly across countries,” they wrote.
Even so, that resilience has not been enough to revive domestic investment or restore confidence in demand, keeping policymakers cautious.
Banks are conflicted
Most financial markets now expect the Bank of Canada to sit tight throughout 2026. As of Dec. 24, LSEG data showed a 97.9% probability that rates would remain unchanged.
Desjardins’ own outlook reflects that view.
“While the unemployment rate may drift lower, growth is likely to stay weak and uncertainty unusually elevated,” the bank wrote.
“But with limited excess capacity, sticky underlying inflation, and fiscal measures gradually filtering through the economy, the bar for a move towards accommodative policy is high.”
In other words, modest economic weakness alone may not be enough to justify further rate cuts.
Yet among Canada’s largest banks, opinions are sharply divided.
Rate cuts
BMO is the most dovish of the Big Six. Earl Davis, head of fixed income and money markets at BMO Global Asset Management, expects the policy rate to fall below neutral — potentially to 2.0 per cent or even 1.75 per cent.
“I don’t think anything would make them raise interest rates if I’m being quite honest,” Davis told BNN Bloomberg, pointing to Canada’s weak productivity relative to the U.S.
He added that higher rates would strengthen the Canadian dollar, discouraging foreign investment at a time when a weaker currency helps offset economic underperformance.
“I do think the Bank of Canada will add additional stimulus to the Canadian economy by having an overnight interest rate that is in the easing zone, outside of neutral,” he said.
Rate hikes
Scotiabank and National Bank of Canada both expect tightening to resume in the second half of 2026.
Scotiabank chief economist Jean-François Perrault forecasts a 50-basis-point increase, lifting the policy rate back to 2.75% — the midpoint of the neutral range.
“We’re still kind of concerned about inflation dynamics,” Perrault said, citing wage growth, weak productivity and the depreciation of the Canadian dollar.
National Bank strategist Ethan Currie said the bank pulled forward its tightening forecast after stronger-than-expected economic data.
“If positive economic momentum continues,” Currie said, “that should see shorter end rates drift higher.”
Both banks identified the labour market and CUSMA as the biggest wild cards.
Rate hold
CIBC, RBC, and TD Bank all see rates staying put through 2026 — though not without reservations.
CIBC chief economist Avery Shenfeld said the Bank “ought to be lowering interest rates further,” but expects policymakers to remain cautious.
“The bank is a little too nervous about inflation and not nervous enough about growth,” Shenfeld said.
RBC’s Jason Daw also expects a hold but sees more upside risk than downside.
“There’s obviously risks in both directions,” he said, noting that slower population growth means even one to 1.5% GDP growth may now represent solid performance for Canada.
TD senior economist Leslie Preston echoed that view, describing Canada as being in a period of slow, adjustment-driven growth.
“We think those two forces are going to balance out over the next year and keep inflation pretty close to the Bank of Canada’s two per cent target,” she said.
A year defined by scenarios
With inflation no longer clearly dominant and trade uncertainty front and centre, many economists now frame 2026 as a year of competing outcomes.
A prolonged hold if uncertainty drags on, a mid-year cut if growth falters materially, or a late-year hike if resilience persists and inflation proves sticky.
For now, one thing is clear: the Bank of Canada is waiting. The confidence that once surrounded its next move has been replaced by caution.
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