But bank doesn’t expect any change until 2027
Royal Bank of Canada’s economics team sees little chance of further relief for variable-rate borrowers, even as Canada’s economy outperformed earlier expectations and the Bank of Canada (BoC) held its policy rate at 2.25% in December.
In a new monthly forecast update, senior economist Claire Fan said Canada’s gross domestic product growth for 2025 was “tracking above prior expectations, and the unemployment rate below.”
She added that RBC’s “cautiously optimistic outlook for Canada’s economy remains intact.”
Cuts seen as over – and hikes a distant prospect
Fan said RBC does not expect the central bank to trim rates further.
“We still don’t see the Bank of Canada cutting the overnight rate,” she said. “The next move is more likely to be a hike although we don’t expect that until 2027.”
That view broadly aligns with other economists projections. Oxford Economics' senior economist Michael Davenport expects the Bank to hold through 2026, with the “next move likely a rate hike to 2.75%, but not until 2027.”
National Bank of Canada economists Taylor Schleich and Ethan Currie said the Bank “stopped short of validating market expectations for rate hikes as soon as the middle of next year.”
“Going forward, we see the Bank (of Canada) holding steady through at least the first half of the year,” they said, flagging a possible hike in late 2026 if unemployment continues to fall and inflation heats up.
Since mid‑2024, the BoC has delivered a series of cuts that lowered its benchmark from 5% to 2.25%, a total of 275 basis points, bringing the rate to the lower end of its neutral range.
Fan said those earlier moves would “continue to help with recovery from a cyclical trough,” but warned that “sticky underlying inflation above the BoC’s 2% target in 2026” remains part of RBC’s base case.
US “stagflation lite” and tariff tensions in the background
Fan said US forecasts are “in a holding pattern” with “stagflation lite” still RBC’s key theme, and core inflation and unemployment both expected to edge higher in 2026.
On rates, she said that after a December cut, the Federal Reserve would probably “squeeze in only one more rate cut in 2026 before holding steady for the remainder of the year.”
RBC’s “issue in focus” examined how heavily tariffed Canadian auto, metals and lumber producers have fared after new US measures, tracking “moderately lower manufacturing production and employment” and “selling prices [that] have generally held up,” suggesting US buyers are absorbing much of the initial hit.
For mortgage professionals, after a rapid 275‑basis‑point easing cycle, policy is now likely to stay parked – and when the BoC does eventually move, RBC believes it would be heading higher, not lower.
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