The Bank of Canada\u2019s path ahead in 2026 is substantially murkier than it was a year ago, when economists were more or less certain of further interest rate cuts.<\/p>\n
In some ways, the end-of-year contexts are similar \u2014 in December 2024, Bank of Canada (BoC) governor Tiff Macklem called the threat of tariffs by the just-elected Donald Trump \u201ca major new uncertainty<\/a>.\u201d One year later, Desjardins Group economists call the Canada\u2013United States\u2013Mexico Agreement (CUSMA) review \u201c[t]he defining issue of 2026.\u201d<\/p>\n What is different is where policy rates sit. At the end of 2024, economists broadly agreed<\/a> that the BoC would make further interest rate cuts, with the debate primarily about how many cuts would happen. The BoC made a further 100 basis points of cuts in 2025, bringing its overnight rate to 2.25 per cent. In an email to Yahoo Finance Canada, Indrani De, head of global investment research and Robin Marshall, director of global investment research at FTSE Russell, say that rate is at \u201cthe easy end\u201d of the BoC\u2019s neutral range \u2014where the interest rate is neither overly stimulative nor overly restrictive.<\/p>\n \u201cThe debate about the next move in BoC rates is now two-way,\u201d they wrote. \u201cBoth up and down.\u201d<\/p>\n That shift reflects an economy that is underperforming but not clearly deteriorating. Most forecasters expect Canada\u2019s real GDP to grow roughly one to 1.5 per cent in 2026 \u2014 below its long-run trend, but well short of a recession, according to outlooks from Desjardins, BMO and National Bank of Canada.<\/p>\n Economists are united in identifying the CUSMA review\u2019s importance. While CUSMA exemptions shielded most Canadian exports<\/a> in 2025, Trump\u2019s skepticism<\/a> of the deal signals precarity ahead. BMO economists say they are ‘relative pessimists,’ noting the deal could face annual reviews rather than a permanent fix.<\/p>\n \u201cThe tariff dynamic introduced in 2025 \u2014 on\u2212again, off\u2212again, threatened and actual \u2014 is expected to continue in 2026\u2026,\u201d Desjardins Group economist Randall Bartlett wrote in a December 19 note. \u201cIn such a climate, businesses are likely to stay on the sidelines, reluctant to invest when the future is so unpredictable. With a deadline of July 1, how Canada\u2019s economy evolves afterward will depend on whether an agreement is reached, for good or for ill.\u201d<\/p>\n FTSE Russell\u2019s De and Marshall say CUSMA is \u201cunlikely to survive in its current \u2018NAFTA 2\u2019 mode, but also note that the world has made numerous other trade deals<\/a> in the shadow of Trump\u2019s trade war.<\/p>\n \u201cThis is a reason that U.S. trade policy uncertainty has had less downside impact broadly across countries,\u201d they wrote.<\/p>\n Story Continues <\/p>\n That resilience, however, has not been enough to restore confidence in domestic investment or demand, leaving policymakers cautious about their next move.<\/p>\n Ahead of the BoC\u2019s December announcement<\/a>, markets had begun to consider the possibility of an interest rate hike in 2026. Observers were surprised by a third consecutive consensus-beating jobs report, which saw the unemployment rate drop to 6.5 per cent, as well as GDP data for the third quarter well above gloomy expectations. Many saw the BoC\u2019s language around its decision to hold, and its re-use of an October line that rates were \u201cat about the right level,\u201d as pushing back against the rate-hike narrative.<\/p>\n The bar for a move towards accommodative policy is high.Desjardins Group economists<\/p>\n<\/blockquote>\n Economists and labour-market analysts broadly expect employment conditions to soften only gradually in 2026. Hiring remains weak, but so do layoffs \u2014 a ‘low-hire, low-fire’ dynamic that has kept unemployment stable, according to Indeed Canada economist Brendon Bernard. Slowing population growth has further limited upward pressure on the jobless rate. In a downside scenario tied to renewed trade disruption, Indeed estimates the jobless rate could rise by roughly 0.4 percentage points, but its baseline outlook points to only modest movement either way.<\/p>\n Most financial industry experts now expect the BoC to hold its overnight rate through 2026. LSEG data as at December 24 gave a 97.9 per cent chance of no change to rates.<\/p>\n \u201cWhile the unemployment rate may drift lower, growth is likely to stay weak and uncertainty unusually elevated,\u201d Desjardins Group wrote in its 2026 outlook. \u201cBut with limited excess capacity, sticky underlying inflation, and fiscal measures gradually filtering through the economy, the bar for a move towards accommodative policy is high.\u201d<\/p>\n In other words, modest economic weakness alone is unlikely to be enough to prompt further rate cuts.<\/p>\n That forecast is not unanimous, however. Capital Group\u2019s outlook argues that the BoC \u201cwill resist a cut amid muted inflation, but softness in the middle of 2026 may force their hand.\u201d And economists at National Bank of Canada write that \u201cthe worst is behind the Canadian economy\u201d and see rate hikes starting next fall.<\/p>\n Many forecasters now frame 2026 as a set of competing scenarios \u2014 a prolonged hold if trade uncertainty drags on, a mid-year cut if growth falters materially, or a late-year hike if resilience persists and inflation proves sticky.<\/p>\n For now, most agree the Bank is waiting for clearer evidence before committing to any next move.<\/p>\n John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf<\/a>.<\/p>\n Download the Yahoo Finance app, available for Apple<\/a> and Android<\/a>.<\/p>\n \n