The Bank of Canada looks past recent strength in the economy leaving rates unchanged.

Even with the recent run of encouraging economic data, the Bank of Canada is still unsure about how durable the Canadian economy really is. The Bank is signaling it may be done lowering interest rates as it waits on the sidelines to see if that recent strength persists. Domestic conditions are still sluggish and resilience in some parts of the economy will need to work harder to offset continued weakness in trade-exposed sectors. We continue to expect the Bank to stay in a wait-and-see mode to assess whether these positive trends will hold.

KEY TAKEAWAYS

In its last policy decision of 2025, the Bank of Canada seemed dovish on the economy but not on interest rates, holding its policy interest rate at 2.25%. When asked at the press conference about whether stronger GDP revisions and the positive developments in the labour market have changed the Bank’s assessment of excess supply, Governor Macklem noted that the revisions reflect additions to supply as well.

We will get an updated forecast in January to assess this, but they were right to question the durability of the economy, as we’ve been disappointed by the domestic demand being flat in the third quarter.

There will be challenges in 2026 that will put pressure on the Cansdian economy, namely the many mortgages that will renew at higher interest rates compared to the pandemic lows and the slower population growth that has been flat in recent months.

We continue to believe the Bank will wait on the sidelines with no rate cuts expected throughout 2026. The choppy recovery will test this approach, but there shouldn’t be any surprises in the next few meetings.

Source: Macrobond