BoC: Holding bias intact with modest growth – RBC Economics

RBC Economics’ Claire Fan notes that Canadian GDP growth has softened slightly into late 2025, leading to a downgrade of Q4 growth to flat, though real per-capita GDP is still expected to improve into 2026. Trade-exposed manufacturing remains weak, but broader spillovers are limited. Stabilizing labour markets and moderating core inflation are seen keeping the Bank of Canada on hold at 2.25% through 2026.

BoC steady as growth underwhelms

"Canadian GDP growth for Q4 is tracking slightly below our prior expectation of a 0.5% annualized increase. We lowered our quarterly forecast down to flat, but note that would still leave per-capita GDP on a path of gradual improvement. We expect this trend will persist in 2026."

"Softer Canadian GDP growth near the end of 2025 was balanced by broad labour market improvements as the unemployment rate trends lower, and above-target, but moderating, core inflation, leaving the BoC comfortable with its firm holding bias. We have growing conviction in this view."

"In Canada, we expect fewer implications from the IEEPA (International Emergency Economic Powers Act) ruling as long as crucial tariff exemptions tied to CUSMA-compliant trade are preserved. Trade-exposed manufacturing sectors continue to underperform, but spillover to the rest of the economy remains limited."

"The Boc held the overnight rate at 2.25% in January for a second consecutive meeting and reiterated that the level of the policy rate “remains appropriate” at the bottom of the neutral range. We continue to expect stabilizing labour conditions, building fiscal support, and moderating inflation pressures to limit need for further easing, keeping the BoC on hold through 2026."

"For Canada, the IEEPA ruling is with little economic implications, without the context of CUSMA (Canada-United States-Mexico Agreement) exemptions that are given to goods compliant with the free trade agreement. In the past, these exemptions have effectively shielded most Canadian exports to the U.S. from IEEPA measures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)