Key Takeaways
- The Bank of Canada is expected to keep its benchmark interest rate unchanged at 2.25% in its first interest rate decision of 2026.
- Economists believe that the central bank will maintain its current policy stance unless there is a significant change in economic growth or the labor market.
- The Bank of Canada’s interest rate decision will be influenced by factors such as inflation, unemployment, and trade policies, including the scheduled review of the Canada-U.S.-Mexico trade agreement.
- The central bank’s decision will have an impact on mortgage rates, business investment, and consumer spending.
- The outlook for key Canadian industries facing tariffs from the United States is still uncertain and could affect the Bank of Canada’s interest rate decision.
Introduction to Interest Rate Decision
The Bank of Canada is set to make its first interest rate decision of 2026 on Wednesday, and many economists expect that the central bank will keep its benchmark interest rate unchanged at 2.25%. This decision will be based on various factors, including inflation, unemployment, and economic growth. The Bank of Canada has already indicated that it believes its monetary policy is at the right level to balance the turbulent economy and lingering inflationary pressures. As a result, financial market odds for a rate hold this week stood at nearly 89% as of Friday, according to LSEG Data & Analytics.
Economists’ Expectations
Economists such as Rishi Sondhi from TD Bank and Avery Shenfeld from CIBC believe that the Bank of Canada will maintain its current policy stance unless there is a significant change in economic growth or the labor market. Sondhi noted that the Bank of Canada has repeatedly said that it is happy with the current policy stance, provided the economy evolves broadly in line with expectations. Shenfeld added that it would take a significant undershooting of economic growth or meaningful softening in the labor market to force policymakers off the sidelines. The Bank of Canada’s governor, Tiff Macklem, has also stated that the central bank believes inflation is likely to hold at around its target of 2% for the coming year, but if the outlook changes, the central bank is prepared to respond.
Economic Data and Projections
The annual rate of inflation was hotter than expected at 2.4% in December, but the unemployment rate jumped to 6.8% in the month. Early data is also suggesting growth slowed in the fourth quarter of the year. Shenfeld noted that the economy seems to have decelerated again in the fourth quarter, inflation is not materially diverging from the Bank of Canada’s objectives, and the unemployment rate is still too high for comfort. The central bank will also release updated projections for the economy and inflation alongside Wednesday’s rate decision. CIBC is among the forecasters expecting the Bank of Canada will neither raise nor lower interest rates in 2026.
Impact on Mortgage Rates and Business Investment
The Bank of Canada’s interest rate decision will have an impact on mortgage rates, which are used by lenders to set interest rates on mortgages and other loans. Shenfeld noted that while mortgage rates aren’t particularly low, suggestions from the Bank of Canada that rate cuts are done could lure some homebuyers off the sidelines this spring, rather than the recent trend of waiting longer in hopes of a cheaper rate. Businesses also watch for signals from the Bank of Canada when they’re making investment and other planning decisions. However, Shenfeld noted that the central bank’s interest rate has not been the biggest source of uncertainty for firms over the past year.
Trade Policies and Uncertainty
The outlook for key Canadian industries facing tariffs from the United States is still uncertain and could affect the Bank of Canada’s interest rate decision. The scheduled review of the Canada-U.S.-Mexico trade agreement is coming up later this year, and Shenfeld noted that trade is still the biggest cloud on the horizon. If the trade barriers worsen, the Bank of Canada may be compelled to ease its monetary policy further. However, Shenfeld also noted that the central bank could see its rate hold disturbed if another serious shock like a sudden stock market downturn hits the economy this year.
Conclusion
In conclusion, the Bank of Canada’s interest rate decision on Wednesday is expected to be a hold, with many economists believing that the central bank will maintain its current policy stance unless there is a significant change in economic growth or the labor market. The decision will be influenced by factors such as inflation, unemployment, and trade policies, and will have an impact on mortgage rates, business investment, and consumer spending. As the economy continues to evolve, the Bank of Canada will need to carefully consider its monetary policy decisions to ensure that it is supporting economic growth while keeping inflation under control.
