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The Bank of Canada’s path ahead in 2026 is substantially murkier than it was a year ago, when economists were more or less certain of further interest rate cuts.
In some ways, the end-of-year contexts are similar — in December 2024, Bank of Canada (BoC) governor Tiff Macklem called the threat of tariffs by the just-elected Donald Trump “a major new uncertainty.” One year later, Desjardins Group economists call the Canada–United States–Mexico Agreement (CUSMA) review “[t]he defining issue of 2026.”
What is different is where policy rates sit. At the end of 2024, economists broadly agreed that the BoC would make further interest rate cuts, with the debate primarily about how many cuts would happen. The BoC made a further 100 basis points of cuts in 2025, bringing its overnight rate to 2.25 per cent. In an email to Yahoo Finance Canada, Indrani De, head of global investment research and Robin Marshall, director of global investment research at FTSE Russell, say that rate is at “the easy end” of the BoC’s neutral range —where the interest rate is neither overly stimulative nor overly restrictive.
“The debate about the next move in BoC rates is now two-way,” they wrote. “Both up and down.”
That shift reflects an economy that is underperforming but not clearly deteriorating. Most forecasters expect Canada’s real GDP to grow roughly one to 1.5 per cent in 2026 — below its long-run trend, but well short of a recession, according to outlooks from Desjardins, BMO and National Bank of Canada.
Economists are united in identifying the CUSMA review’s importance. While CUSMA exemptions shielded most Canadian exports in 2025, Trump’s skepticism of the deal signals precarity ahead. BMO economists say they are ‘relative pessimists,’ noting the deal could face annual reviews rather than a permanent fix.
“The tariff dynamic introduced in 2025 — on−again, off−again, threatened and actual — is expected to continue in 2026…,” Desjardins Group economist Randall Bartlett wrote in a December 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 deadline of July 1, how Canada’s economy evolves afterward will depend on whether an agreement is reached, for good or for ill.”
FTSE Russell’s De and Marshall say CUSMA is “unlikely to survive in its current ‘NAFTA 2’ mode, but also note that the world has made numerous other trade deals in the shadow of Trump’s trade war.
“This is a reason that U.S. trade policy uncertainty has had less downside impact broadly across countries,” they wrote.
That resilience, however, has not been enough to restore confidence in domestic investment or demand, leaving policymakers cautious about their next move.
Ahead of the BoC’s December announcement, markets had begun to consider the possibility of an interest rate hike in 2026. Observers were surprised by a third consecutive consensus-beating jobs report, which saw the unemployment rate drop to 6.5 per cent, as well as GDP data for the third quarter well above gloomy expectations. Many saw the BoC’s language around its decision to hold, and its re-use of an October line that rates were “at about the right level,” as pushing back against the rate-hike narrative.
The bar for a move towards accommodative policy is high.Desjardins Group economists
Economists and labour-market analysts broadly expect employment conditions to soften only gradually in 2026. Hiring remains weak, but so do layoffs — a ‘low-hire, low-fire’ dynamic that has kept unemployment stable, according to Indeed Canada economist Brendon Bernard. Slowing population growth has further limited upward pressure on the jobless rate. In a downside scenario tied to renewed trade disruption, Indeed estimates the jobless rate could rise by roughly 0.4 percentage points, but its baseline outlook points to only modest movement either way.
Most financial industry experts now expect the BoC to hold its overnight rate through 2026. LSEG data as at December 24 gave a 97.9 per cent chance of no change to rates.
“While the unemployment rate may drift lower, growth is likely to stay weak and uncertainty unusually elevated,” Desjardins Group wrote in its 2026 outlook. “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 is unlikely to be enough to prompt further rate cuts.
That forecast is not unanimous, however. Capital Group’s outlook argues that the BoC “will resist a cut amid muted inflation, but softness in the middle of 2026 may force their hand.” And economists at National Bank of Canada write that “the worst is behind the Canadian economy” and see rate hikes starting next fall.
Many forecasters now frame 2026 as a set of competing scenarios — a prolonged hold if trade 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, most agree the Bank is waiting for clearer evidence before committing to any next move.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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