After jobs surprise, market bets Bank of Canada will raise interest rates before end of 2026

Eric Herzberg

(Bloomberg) — Expectations are growing that the Bank of Canada’s next move will be to raise interest rates next year, as unexpected strength in the country’s labor market suggests further easing of monetary policy may not be needed despite U.S. tariffs.

Overnight swap traders are now fully pricing in an October 2026 rate hike by the central bank. Just a day earlier, markets were pricing in the possibility that Governor Tiff Macklem and his officials would cut borrowing costs next year.

The repricing follows an unexpected 0.4 percentage point drop in Canada’s unemployment rate in November and stronger-than-expected job growth. Bonds were sold off across the board, with the five-year benchmark government debt yield rising 20 basis points intraday.

“Today’s data does appear to confirm that the economy is recovering after trade-induced weakness earlier this year. As such, we continue to expect the Bank of Canada’s rate-cutting cycle to be over,” said Andrew Grantham, economist at Canadian Imperial Bank of Commerce.

Officials have signaled that their easing cycle is coming to an end. The central bank cut interest rates by a quarter of a percentage point in October but said they would be at “about an appropriate level” if inflation and economic developments were in line with their forecasts. Policymakers have also warned that structural damage from the ongoing trade dispute with the United States limits their ability to support the economy, especially if tariffs lead to higher prices.

At the same time, officials said they were prepared to respond if the outlook for inflation and growth changed.

Canadians themselves are even more hesitant about whether the Bank of Canada is done cutting interest rates.

A poll conducted by Nanos Research Group for Bloomberg News showed that 44% of respondents expected the policy rate to remain at 2.25% next year, while 31% believed there would be at least one more rate cut. About 9% expect a rate hike, and nearly one-fifth are unsure.

The poll results could have implications for how monetary policy is transmitted through the economy. Households anticipating further easing may put off large-scale purchases until borrowing costs fall, limiting consumption.

Different groups of people have different expectations. Nearly half of women surveyed expect rates to remain unchanged, double the share who expect further easing. More than half of Canadians aged 55 and older believe interest rates will remain unchanged – again about twice the proportion expecting a rate cut.

The survey, conducted among 1,009 Canadians between Nov. 29 and Dec. 2, was accurate 19 out of 20 times by plus or minus 3.1 percentage points.

The Bank of Canada will set interest rates on December 10. Markets and economists surveyed by Bloomberg expect the central bank to keep interest rates steady at the meeting.

—With help from Mario Baker Ramirez.

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Last modified: December 5, 2025