At its first meeting in 2026, the Bank of Canada held the overnight rate at 2.25% as expected and reiterated the view that the level of the policy rate ‘remains appropriate’ at the bottom of the neutral range.

This was the BoC’s second consecutive hold after the December meeting, with stabilizing labour conditions, building fiscal support, and moderating inflation pressures toward the end of 2025 limiting the need for further easing.

In the new year, we and the BoC expect these trends to persist. Governor Macklem’s comments in the press conference and the accompanying Monetary Policy Report outlined expectations for modest economic growth and at-target Inflation, contingent on a stable trade environment.

Per-capita economic backdrop is expected to improve, supported by monetary easing in the past and building fiscal stimulus including the new GST rebate. While major tariff escalations aren’t anticipated, recent tariff threats from the U.S. administration underscores that heightened uncertainty will linger.

Overall, the case for further easing is weak, yet persistent trade uncertainty and gradually moderating inflation are also arguing against a near-term pivot to rate hikes. As a base case, we expect the BoC will maintain the overnight rate steady through the end of 2026.

Here’s a more detailed read of the economic projections from the January Monetary Policy Report:

Topline GDP growth projections still expect weaker growth in 2026 and 2027. An upside surprise to Q3 2025 GDP growth was partially offset by a downward revision to expected growth in Q4, to 0% from 1% previously (slightly below our own 0.5% forecast.) GDP growth projections in 2026 and 2027 were left unchanged at softer levels of 1.1% and 1.5% (previously 1.1% and 1.6%.)

Estimate of economic slack largely unchanged. Upward revisions to GDP growth in prior years left the economy on a stronger path heading into the 2025. The BoC—like us—incorporated much of this strength to higher potential output growth, reflecting better-than-expected productivity gains and leaving the estimated output gap unchanged at between -1.5% to -0.5% in Q4 2025.

Going forward potential growth estimates are expected to soften, weighed by slower population assumptions and reduced business investment dampened by uncertainty. In terms of point estimates, potential output growth is expected to slow from 2.3% in 2025, to around 1% over 2026 and 2027.

Slower economic growth still expected to absorb slack. Combining those key assumptions, the BoC implicitly assumes soft GDP growth will still be enough to absorb excess supply in the economy slowly over 2026 and 2027. That is consistent with our own expectation that the unemployment rate (not projected by the BoC) will move lower in the year ahead.

Headline inflation to hover around the 2% target over the forecast horizon, with excess supply limiting businesses’ pricing power but broadly offset by higher business costs, including commodity prices, import prices and shipping costs. Trade development and financial conditions remain key risks to that outlook.

Claire Fan
Senior Economist | Royal Bank of Canada
claire.fan@rbc.com | 416-974-3639

Source: RBC Economics