Key Takeaways:
- The Bank of Canada’s path ahead in 2026 is uncertain due to various factors, including the Canada-United States-Mexico Agreement (CUSMA) review and trade policy uncertainty.
- Economists expect Canada’s real GDP to grow roughly 1-1.5% in 2026, below its long-run trend, but not in recession territory.
- The CUSMA review is a major concern, with economists identifying it as the defining issue of 2026.
- The Bank of Canada is expected to hold its overnight rate through 2026, with a 97.9% chance of no change to rates.
- The bar for a move towards accommodative policy is high, with modest economic weakness alone unlikely to prompt further rate cuts.
Introduction to the Bank of Canada’s Uncertain Path
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. The end-of-year contexts are similar, with the Canada-United States-Mexico Agreement (CUSMA) review being a major concern. However, the policy rates sit at a different level, with the Bank of Canada making further interest rate cuts in 2025, bringing its overnight rate to 2.25%. This rate is considered to be at the "easy end" of the Bank of Canada’s neutral range, where the interest rate is neither overly stimulative nor overly restrictive.
Economic Growth and Interest Rates
Economists expect Canada’s real GDP to grow roughly 1-1.5% in 2026, which is below its long-run trend, but not in recession territory. The debate about the next move in interest rates is now two-way, with both up and down possibilities. The economy is underperforming but not clearly deteriorating, and most forecasters expect the Bank of Canada to hold its overnight rate through 2026. The bar for a move towards accommodative policy is high, with modest economic weakness alone unlikely to prompt further rate cuts.
The CUSMA Review and Trade Policy Uncertainty
The CUSMA review is a major concern, with economists identifying it as the defining issue of 2026. The review could face annual reviews rather than a permanent fix, and Trump’s skepticism of the deal signals precarity ahead. The tariff dynamic introduced in 2025 is expected to continue in 2026, with businesses likely to stay on the sidelines and reluctant to invest due to the unpredictable future. The outcome of the CUSMA review will depend on whether an agreement is reached, and how Canada’s economy evolves afterward.
Resilience in the Face of Trade Policy Uncertainty
Despite the trade policy uncertainty, the world has made numerous other trade deals in the shadow of Trump’s trade war. This resilience has not been enough to restore confidence in domestic investment or demand, leaving policymakers cautious about their next move. The Bank of Canada’s language around its decision to hold interest rates and its re-use of an October line that rates were "at about the right level" suggests that it is pushing back against the rate-hike narrative.
Employment Conditions and Interest Rates
Economists and labour-market analysts broadly expect employment conditions to soften only gradually in 2026. Hiring remains weak, but so do layoffs, which has kept unemployment stable. Slowing population growth has further limited upward pressure on the jobless rate. In a downside scenario tied to renewed trade disruption, the jobless rate could rise by roughly 0.4 percentage points, but the baseline outlook points to only modest movement either way.
Forecasting the Bank of Canada’s Next Move
Most financial industry experts now expect the Bank of Canada to hold its overnight rate through 2026, with a 97.9% chance of no change to rates. However, some forecasters argue that the Bank of Canada may cut interest rates if growth falters materially, or hike rates if resilience persists and inflation proves sticky. The Bank of Canada is waiting for clearer evidence before committing to any next move, and 2026 is framed as a set of competing scenarios, including a prolonged hold, a mid-year cut, or a late-year hike.
