Bank of Canada expected to keep rates on hold in December as GDP improves, but underlying weakness remains
The stronger-than-expected GDP data strengthened expectations that the Bank of Canada will keep its policy rate unchanged in December. In the third quarter, GDP rebounded by 2.6% on an annual basis, much higher than expected, while in September it rose slightly by 0.2% after falling in August.
But economists say overall strength doesn’t tell the whole story.
“The data for this quarter will be noisy due to the trade shock in Q2, so what’s important here is to look at the flat performance of domestic demand, which paints a subdued picture of what we expected,” TD Bank’s Andrew Hencic wrote. He added that once external factors are removed, domestic demand ended up being essentially flat at -0.1% quarter-on-quarter, which he believes supports continued rate hikes in December.
Douglas Porter, chief economist at BMO, believes the unexpected upside is enough reason for the Bank of Canada to keep rates unchanged next month.
He said the 2.6% reading would “firmly keep them on the sidelines” at next month’s meeting, noting that the central bank would have no incentive to tighten monetary policy further unless inflationary pressures resurface.
The market reacted quickly, with the Canadian five-year government bond yield climbing nearly two basis points to 2.68%.
‘Rising uncertainty’ complicates numbers
This morning’s data comes as recession fears continue to be tested, with CIBC economist Benjamin Tal recently claiming Canada is in a “per capita recession.” Economists remain divided over how negatively some underlying GDP details should be interpreted.
CIBC’s Andrew Grantham pointed out that although the quarterly GDP data was stronger than expected, “the composition of growth is not ideal, with an 8.6% decline in imports being the main driver of growth.”
Statistics Canada also revised several previous GDP data, lowering the second-quarter growth rate from 1.8% to 1.6%. Other data points were also revised upward, including real GDP per capita rising to $60,071 in the third quarter.
“…Growth forecasts for 2022, 2023 and 2024 are each revised up by 1.4 percentage points,” Porter noted. “It is now estimated to have grown at 2.0% per year over the past two years, slightly above the economic trend of the past 20 years.”
In his view, Porter believes the economy’s performance is enough to “temporarily put to rest rumors of a recession.”
To further complicate matters, trade data for September is believed to be incomplete as the U.S. government shutdown hampered its release. “Statistics Canada will have to estimate this number, which increases the likelihood of revisions,” Hunsik noted.
Early fourth-quarter data points to weakening momentum
The momentum from the latest GDP data is expected to be short-lived. StatCan’s preliminary GDP forecast for October shows GDP will fall sharply by 0.3%.
That estimate, coupled with continued tariff pressure from the United States and elsewhere, suggests the economy still has plenty of room to make up after weakness earlier in the year.
“The Canadian economy will swing back in the opposite direction in the fourth quarter,” CIBC’s Grantham wrote. “Even assuming a rebound in November GDP as a temporary strike impact dampened last month’s data, growth is likely to stall.”
“Ultimately the trend in domestic demand is not encouraging, with exports showing few signs of recovery from the tariff-induced second-quarter hit,” he added.
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Last modified: November 28, 2025
