With its last decision of the year approaching, the Bank of Canada is contending with new economic surprises that blur the 2026 outlook, even as it’s expected to hold steady this week.

The Bank is widely expected to hold its policy rate at 2.25%, a level policy-makers have repeatedly described as appropriate for guiding inflation toward target while allowing the economy to adjust.

The U.S. Federal Reserve, meanwhile, is expected to deliver another quarter-point cut later the same day, lowering its target range to 3.75%–4.00%.

Canada’s backdrop has changed noticeably since the bank’s October meeting. Job gains have been surprisingly strong, with three consecutive monthly increases pulling the unemployment rate down to 6.5%. Wage growth has stayed solid, hours worked are rising and recent revisions to GDP and productivity suggest the economy has been a bit stronger than earlier estimates implied. Third-quarter growth, which the bank had expected to come in at 0.5% annualized, instead landed at 2.6%.

As CIBC’s Avery Shenfeld notes, despite “some weak spots within the Q3 GDP figures,” the overall results support the bank’s message that rates are “at an appropriate level” and could remain on hold “for an extended period.”

Inflation has cooled from earlier peaks, though not yet to the comfort level policy-makers would like.

Scotiabank’s Derek Holt points out that “core inflation remained warm in October,” with several underlying measures still above two per cent. Wage settlements, inventory costs and supply-chain adjustments continue to feed into those pressures.

As a result, analysts expect the bank to reinforce the line from its October statement that the current rate is “about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment.”

How the latest data is guiding the bank’s near-term stance

Even with the recent momentum, economists say the recovery still feels uneven.

TD’s Andrew Hencic writes that although the job market has improved, “there is still slack in the labour market and the trade picture heading into next year remains highly muddled.” With inflation expected to ease gradually rather than sharply, he expects the bank to stay on the sidelines while it looks for clearer signs of a sustained recovery.

RBC’s Claire Fan and Nathan Janzen strike a similar tone, noting that employment rose by roughly 54,000 in November, following strong increases in September and October, and that the drop in the unemployment rate suggests the market is stabilizing. Still, they warn that underlying price pressures “are running above the BoC’s 2% inflation target, and could prove stickier than the central bank would like.”

Taken together, the data gives the bank little incentive to move this week. Officials are likely to stick to a steady tone while they wait for a longer run of inflation and trade numbers to clarify where the economy is headed, the economists say.

What economists expect in 2026 as markets price in potential hikes

The more interesting conversation is now centred on next year, as markets and economists look for clues on where rates may head longer term.

While no one expects a rate move on Wednesday, forecasters are increasingly focused on the timing of the next adjustment, and many now believe that move could eventually be upward.

BMO’s Douglas Porter says the combination of stronger job creation, upgraded productivity and resilient household spending has “emboldened the hawks to call for hikes.” The job market’s sharp improvement, he notes, has made next week’s decision straightforward and added weight to the view that the bank’s easing cycle has likely run its course.

One of the clearest hawkish signals has come from Scotiabank’s Derek Holt, whose call for future rate hikes — first reported by Canadian Mortgage Trends on Nov. 16 — has drawn more attention as the data has strengthened. November’s strong jobs report and firmer output have led others to question how much economic slack remains, with markets now assigning meaningful odds to a late-2026 hike.

Holt writes that the bank’s Taylor Rule scenarios suggest the policy rate “is presently around 25–50bps too low,” and that his base-case outlook shows “50bps of hikes next year starting in 2026Q3.” While those estimates are not forecasts, they underscore how the balance of risks around inflation and capacity has changed over the past few months.

CIBC’s Shenfeld draws a similar conclusion, writing that the bank, having “already eased more aggressively than the Fed,” is likely to be “comfortable standing pat” while it evaluates how quickly inflation settles.

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Last modified: December 8, 2025