While the Bank of Canada is widely expected to keep interest rates on hold at its first meeting of the year on Wednesday, analysts differ on the central bank’s subsequent moves.
Some cite recent macroeconomic data pointing to strength in the labor market, economic momentum, cooling inflation, and upcoming trade talks with the United States as reasons to rule out a rate cut on Jan. 28. “We expect they will hold rates steady, and characterize the current stance of monetary policy as well-suited to the economic conditions and balance of risks,” says Tiffany Wilding, economist at PIMCO.
Since the Bank held rates steady at its December meeting, the market has shifted from pricing in no policy move in 2026 to predicting a hike before the year’s end. Tiago Figueiredo, macro strategist at Desjardins Capital Markets, says markets see less than 10% odds of a cut this month, but almost a 40% chance of a raise by year-end. “That looks premature. We think the hike risk is a 2027 story, not 2026,” he adds.
The Bank of Canada enacted four rate cuts totaling 100 basis points in 2025, bringing its policy rate down to 2.25%, the bottom of its neutral range (the theoretical rate at which monetary policy neither stimulates nor restricts the economy).
Wilding says policymakers are likely to wait and see how negotiations shake out at the Canada-United States-Mexico Agreement renewal talks in July.
What to Expect from Wednesday’s Meeting
Jack Manley, global market strategist at JP Morgan Asset Management, expects the Bank’s Governing Council to maintain that the current policy is accommodative enough to support the economy. “I expect no change to rates, no meaningful change to guidance, and optimistic rhetoric about the Canadian economy, similar to December’s meeting,” he says.
Crista Caughlin, director and portfolio manager at Mawer Investment Management, expects the Bank to remain on hold “with a neutral/dovish tone.” A dovish tone implies the central bank is less worried about inflation and more focused on stimulating the economy, often indicating willingness to cut rates. The slowdown in inflation and a growth beat in the third quarter of 2025 “would suggest the Bank has time to continue assessing the outlook,” she says.
Echoing peers, Desjardins’ Figueiredo expects no rate cut on Wednesday, but he says “the tone of the central bank’s communications should turn more cautious.”
JP Morgan’s Manley says the the focus again turns to how Bank of Canada Governor Tiff Macklem positions his view on the economy. Of particular consequence would be “what risks [Macklem] determines are worth acknowledging, and what role he views the Bank playing in 2026, as the federal government ramps up spending and the baton is passed from monetary to fiscal authorities.”
Officials have previously indicated that it is not yet clear if the next change in policy rates will be higher or lower. “We do not expect them to have reached any different determination at this meeting,” says Citi economist Veronica Clark. “But the most notable thing to watch for is any indication that this assessment may be shifting.”
Divided Opinions on the Next Policy Move
Views begin to diverge on the rate outlook beyond January. The clearest swing factor in 2026, both for the Canadian economy and monetary policy, are trade policy issues with the US and the CUSMA negotiations, according to PIMCO’s Wilding. “If trade tensions die down and CUSMA is renewed, we think exports and the economy can recover in 2026. Leaving the Bank of Canada on hold, or possibly doing a few fine-tuning hikes to bring rates back to the midpoint of the neutral range,” she says. “Conversely, a more disorderly trade scenario argues for further cuts.”
With inflation under control, this might be a good time for the Bank to “start pushing back against market pricing for a hike later this year,” Desjardins’ Figueiredo says.
In stark contrast, Citi’s Clark still expects the Bank to cut rates twice this year. “We would disagree [with the market’s assessment], and see the chance of further cuts as much more likely,” she says, adding that her “base case this year [is] for two more 25-basis-point cuts.”
Clark thinks the market is underappreciating how a possible period of below-target inflation could push the central bank toward monetary easing. “Demand indicators, like the share of firms indicating significant difficulty meeting demand from the Business Outlook Survey, remains very low, and it has tended to lead trends in core inflation.” She explains that this would suggest inflation at or below 2% in the coming months, and that such a scenario could make future rate cuts more likely.
Mawer’s Caughlin identifies sustained weakness in employment brought on by “a resurgence of the trade war” as the main factor that could force the Bank of Canada to cut rates.
JP Morgan’s Manley is also concerned about the implications the US’ unpredictable foreign policy has for Canada, evidenced recently by a spike in geopolitical tensions surrounding Venezuela and Greenland. “Recent developments in US foreign engagement and a sharper tone from the current [US] administration may place some downward pressure on Canadian confidence,” he says.
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