As the final decision of the year approaches, the Bank of Canada is grappling with new economic surprises that cloud the outlook for 2026, although it is expected to hold steady this week.
The central bank is widely expected to keep its policy rate at 2.25%, a level policymakers have repeatedly said is appropriate to guide inflation toward target while allowing the economy to adjust.
Meanwhile, the Federal Reserve is expected to cut rates by another 25 basis points later the same day, lowering the target range to 3.75%–4.00%.
The backdrop in Canada has changed significantly since the central bank’s October meeting. Job growth was unexpectedly strong, with three consecutive months of growth pushing the unemployment rate down to 6.5%. Wage growth remains steady, hours worked are increasing, and recent revisions to GDP and productivity suggest the economy is stronger than previously estimated. The bank originally expected annual growth in the third quarter to be 0.5%, but it actually was 2.6%.
As CIBC’s Avery Shenfeld noted, while there were “some weaknesses in the third-quarter GDP data,” the overall results supported the bank’s message that rates were “at appropriate levels” and likely to remain unchanged “for the longer term.”
Inflation has eased from previous peaks but has not yet reached the comfort levels policymakers had hoped for.
Derek Holt of Scotiabank noted that “core inflation remained warm in October,” with a number of underlying indicators still above 2%. Payroll settlements, inventory costs and supply chain adjustments continue to add to these pressures.
As a result, analysts expect the central bank to reinforce its statement in October that the current interest rate is “about the appropriate level to keep inflation close to 2% while helping the economy through this period of structural adjustment.”
How the latest data guides the bank’s near-term stance
Economists say that despite recent momentum, the recovery remains uneven.
TD Bank’s Andrew Hencic wrote that despite the improvement in the job market, “the labor market remains weak and the trade picture remains very messy next year.” With inflation expected to ease gradually rather than sharply, he expects the central bank to remain on the sidelines while looking for clearer signs of a sustained recovery.
RBC’s Claire Fan and Nathan Janzen echoed similar sentiments, noting that employment rose by about 54,000 jobs in November, following strong gains in September and October, and that the falling unemployment rate suggested the market was stabilizing. Still, they warned that underlying price pressures “are running above the Bank of Canada’s 2 per cent inflation target and may be more troublesome than the Bank of Canada hopes.”
Taken together, the data do not provide incentives for banks to take action this week. Economists said officials were likely to stick to a stable tone while awaiting longer-term inflation and trade data for clarity on where the economy is heading.
Bank of Canada overnight target rate
As markets price in potential rate hikes, what economists expect in 2026
The more interesting conversations are now focused on next year, as markets and economists look for clues about the long-term path of interest rates.
While no one expects a rate move on Wednesday, forecasters are increasingly focused on the timing of the next adjustment, and many now believe rates may eventually rise.
BMO’s Douglas Porter said strong job creation, rising productivity and robust household spending “emboldened hawks to call for higher rates.” He noted that the sharp improvement in the job market makes next week’s decision straightforward and reinforces the view that the central bank’s easing cycle may be over.
One of the clearest hawkish signals came from Scotiabank’s Derek Holt, who called for future rate hikes – first reported Canadian Mortgage Trends Nov. 16 – As data strengthens, it draws more attention. November’s strong jobs report and firmer output have left others questioning how much weakness remains in the economy, with markets now pricing in a rate hike in late 2026 as a strong possibility.
Holt wrote that the bank’s Taylor rule scenario suggests policy rates are “currently about 25-50 basis points too low,” and his base case outlook shows “a 50 basis point hike next year starting in the third quarter of 2026.” While these estimates are not forecasts, they highlight how the balance of risks around inflation and capacity has changed over the past few months.
CIBC’s Shenfeld reached a similar conclusion, writing that the bank “has been more aggressive in easing policy than the Fed” and may “comfortably sit on hold” as it assesses how quickly inflation will stabilize.
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Last modified: December 7, 2025
