Banking giant's latest quarterly outlook suggests the economy will continue to improve
Canada’s economy entered 2026 on unsteady footing, but Royal Bank of Canada (RBC) economists argue that monetary policy has already done much of its work – and that fiscal support now matters more for keeping growth alive.
In their latest Quarterly Canadian Outlook, the team said the Bank of Canada still has room to respond if conditions deteriorated.
“The BoC still has room to boost to the economy through lower interest rates if the backdrop were to weaken, or inflation to slow more than we expect,” the report said.
That safety valve, however, remains firmly in the background.
“Our cautious optimism that the economy will continue to improve means we don’t think further reductions will be needed,” the economists said, pointing to stabilizing labour markets and an easing shock from last year’s United States tariff escalation.
Instead, the heavy lifting has already shifted to government balance sheets.
“Government spending jumped an annualized 6% in Q4, led by a surge in spending on defence,” the report said, even as headline GDP contracted on inventory drawdowns.
Another passage captured the authors’ policy bias: “We continue to view government spending as a better policy lever to address the current fragmented economic backdrop than blanket interest rate cuts.”
At the same time, after the Bank’s late‑2025 cut, economists warned that cheaper money alone is unlikely to reignite demand in the country’s largest housing markets, describing the impact of rate moves as uneven and dependent on local fundamentals.
An earlier RBC analysis argued that still‑firm domestic demand and sticky underlying inflation would make it difficult for policymakers to justify pushing the overnight rate below its current neutral range, reinforcing expectations for a prolonged pause.
Variable‑rate borrowers might benefit from the cuts already delivered, but further relief would likely hinge on a deeper downturn or a sharper inflation retreat.
In the meantime, fiscal measures – from defence contracts to housing earmarks – are set to shape regional growth paths and credit demand more than incremental tweaks to the policy rate.
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