Central bank expected to hold rates steady for a while before raising again in 2027
Financial and business leaders are signalling growing concern about Canada’s economic outlook, with a one-in-three chance the country could enter a recession within six months, according to new data from the Bank of Canada.
But most market watchers still aren't expecting interest rates to move lower anytime soon. The central bank’s Market Participants Survey, conducted from September 9 to October 1 among 30 respondents including banks, dealers, insurers, pension funds, and asset managers, found most expect the policy rate to remain at 2.25% for a prolonged period before a possible increase to 2.5% in the third quarter of 2027. Still, 63.3% said the risks were “skewed to a lower path,” suggesting widespread caution about growth and inflation prospects.
The survey took place before the Bank’s October 29 decision to cut its benchmark rate to 2.25%. Governor Tiff Macklem said the rate level was “right to support the economy without spurring inflation,” but added that monetary policy can only partially offset the economic effects of the ongoing trade dispute with the United States.
Results from the Business Outlook Survey for the third quarter, which was conducted from August 7 to September 3, show that firms are holding off on new investment and hiring plans. Most reported weak demand and uncertainty tied to tariffs and trade policies. One-year-ahead inflation expectations have settled around 3%, while longer-term expectations remain close to 2.5%.
Data indicated that roughly 90% of survey participants believe Canada’s economy is performing below potential. Statistics Canada reported that output declined by 0.3% in August, although overall growth from July through September is projected at 0.4%. The Bank’s survey participants placed the probability of a recession at 35%, unchanged from the previous quarter but higher than the 20% level a year earlier.
Federal budget projections released in October estimate a C$78.3-billion deficit for 2025–26, as Ottawa increases spending to counter the impact of tariffs and weaker exports. The Market Participants Survey was completed before trade negotiations with the United States were suspended in late October after President Donald Trump halted talks following the airing of an Ontario government anti-tariff campaign in US media.
When asked about the factors that could determine Canada’s near-term outlook, 87% of respondents identified easing trade tensions as the most important factor, while 90% said escalating tensions would pose the greatest risk. Other downside concerns included softer consumer spending, cited by 63%, and weakness in the housing market, noted by 40%.
Survey participants forecast real GDP growth of 0.6% in 2025 and 1.7% in 2026, with inflation returning to 2% by late 2025. The Canadian dollar, trading near US$0.71, is expected to reach US$0.75 in 2026, while West Texas Intermediate crude is projected to end the year at about US$62 per barrel, based on the survey median.
With inflation moderating and businesses showing little appetite for expansion, the Bank faces limits on how much further policy adjustments can influence the economy. Macklem has said fiscal measures will likely carry more weight as policymakers seek to stabilize growth while keeping inflation in check.
