Markets largely expect a rate hold, but some say the next move could be upwards
As the Bank of Canada prepares for its final rate decision of 2025 on Wednesday, economists and markets largely expect policymakers to finish the year on the sidelines, keeping the policy rate at 2.25%.
The backdrop has shifted sharply since the summer. A surprise 2.6% annualized jump in third‑quarter real GDP, after a second‑quarter contraction, underlines that “this is an economy that is soft, but is certainly not in recession,” said Jimmy Jean, chief economist at Desjardins Group.
Recent labour force data told the same story, with 54,000 jobs added in November and unemployment dropping to 6.5%. Moreover, Shelly Kaushik, senior economist at BMO, said the retail sales data underscored ongoing headwinds from trade uncertainty.
"Canadian retail sales continue a holding pattern as support from lower interest rates faces headwinds from trade uncertainty," Kaushik said.
The broader picture, she added, was "one of mild economic growth that will do little to move the needle for the Bank of Canada heading into its December meeting."
New data and an old message
In October, the Bank cut to 2.25% and signalled the easing cycle was likely finished if the economy evolved broadly as forecast.
Since then, “there is now no doubt the bank will stand aside,” BMO chief economist Doug Porter said, pointing to stronger‑than‑expected growth and jobs numbers.
“There’s pretty clear there is no major compelling reason to cut rates further at this time,” Jean said.
Royal Bank of Canada economists Nathan Janzen and Claire Fan noted that “labour markets have also shown more signs of stabilizing,” even as tariff‑exposed manufacturers remained weak.
Markets price in a long hold
Derivatives markets put overwhelming odds on a hold this week, with many participants betting the Bank would stay on pause through most of 2026 and that the next move could be a hike rather than another cut.
For mortgage lenders and brokers, a prolonged pause near the neutral rate means little immediate relief on borrowing costs, but more clarity after a year of tariff‑driven volatility and shifting forecasts.
Earlier in 2025, the Bank refrained from offering a single central outlook, instead publishing scenarios around US trade policy and inflation risks before returning to formal projections in the fall.
Economists such as Desjardins’ Tiago Figueiredo and C.D. Howe Institute’s Jeremy Kronick argued that any move higher in 2026 would hinge on how the Bank reassesses potential output and the economy’s true speed limit – and whether upside risks to inflation from tariffs and sticky rents persist.
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