Economic Prospects Dim in Canada, Adding Complexity to Monetary Policy Decisions
The Bank of Canada (BoC) has kept its benchmark overnight rate at 2.75% as of July 30, 2025, signalling a cautious approach amid easing headline inflation but persistent core inflation pressures.
Four out of Canada's six biggest banks, including Canadian Imperial Bank of Commerce and Royal Bank of Canada, expect another interest rate hike from the BoC to be on hold for the time being. This change in projection came after the blowout jobs report in November, which saw over 100,000 jobs added, and the unemployment rate falling to near a record low of 5%.
However, underlying price pressures have been trending higher, with the weakening business outlook and a recent string of stronger-than-expected economic data complicating the BoC's plan response. The yield on benchmark two-year Canada bonds stands at 3.586%, reflecting market expectations.
Traders in overnight swaps markets put the odds of a 25-basis-point rate hike at more than 80%. Yet, the current forecast for interest rate changes by the BoC in 2023 is that the policy rate is expected to remain largely stable, with no immediate changes indicated.
Economic data suggests a moderate growth recovery after a mid-year slowdown, with GDP growth around 1% annualized in late 2025 under current trade conditions. Inflation has eased but remains sticky, which discourages immediate rate cuts.
Long-term forecasts expect the policy rate to trend slightly downward in 2026-2027 but with potential reversion to normalized levels later. Rate cuts (up to 25 basis points) are possible if economic weakening and inflation pressures persist, but rate increases in 2025 are currently considered unlikely.
Toronto-Dominion Bank planners predict that the BoC might be close to the end of its tightening cycle. Many workers do not expect their earnings to catch up with recent cost stress, and about half of customers who expect a recession believe it will be modest in extent and size.
In summary, for the remainder of 2023 and into 2025, markets and analysts expect the BoC to keep rates steady for now, balancing inflation control with economic resilience, with potential rate cuts only if inflation falls below target and growth weakens notably. The Bank of Canada's studies show that the view among Canadian firms is at its cheapest, given the Covid-19 pandemic and elevated inflation expectations. The data suggest that the BoC won't need to raise interest rates much to bring need and supply back into equilibrium.
- The current forecast for interest rate changes by the Bank of Canada (BoC) in 2023 is that the policy rate is expected to remain largely stable, suggesting a cautious approach in the banking-and-insurance sector.
- Many Canadian firms, amidst the Covid-19 pandemic and elevated inflation expectations, hold a view that is at its cheapest, signifying potential for growth and recovery in the industry.
- Traders in overnight swaps markets put the odds of a 25-basis-point rate hike at more than 80%, indicating a focus on finance and adjustments in the economy.
