By Indradip Ghosh
BENGALURU, Jan 23 (Reuters) – The Bank of Canada will keep its overnight interest rate on hold through 2026, according to an even stronger majority of economists polled by Reuters than one month ago on expectations the economy will grow steadily with inflation largely contained.
Since the Canadian central bank held its key rate at 2.25% last month and signalled an extended pause, economic data have sent mixed signals, giving policymakers more reason to stay on hold.
Canada’s job growth stalled in December after three straight monthly gains, pushing up the jobless rate, while inflation rose more than expected even though closely watched core measures fell.
The risk of renewed trade tensions with the U.S., Canada’s top export destination, also argues for caution, some economists said. The U.S.-Mexico-Canada Agreement (USMCA) comes up for review in July.
The BoC will keep its key interest rate at 2.25% on January 28, all 35 economists in the January 20-23 Reuters poll predicted.
Nearly 75% of economists, 26 of 35, forecast the central bank will keep rates steady through 2026, representing a larger majority than the just over 60% who expected that outcome in December.
The BoC cut rates by 275 basis points between June 2024 and October 2025, making it one of the most aggressive central banks among its G10 peers.
“At this point, the BoC is ready to take a fairly long wait-and-see stance. If there’s a risk of a move, it’s more likely to be a cut than a hike this year,” said Avery Shenfeld, chief economist at CIBC Capital Markets. The bank was among the most accurate forecasters for the Canadian economy in Reuters polls last year, according to LSEG StarMine calculations.
“There’s still a lot of slack in the labour market and a fair degree of uncertainty over the pace of the expansion this year and rates are not yet that stimulative.”
The overnight rate is currently at the low end of the 2.25%-3.25% range the Canadian central bank estimates as neutral, which neither stimulates nor restricts economic activity.
ECONOMIC GROWTH EXPECTED TO PICK UP PACE IN 2026
Canada’s economy has stayed largely resilient despite U.S. tariffs of 25% to 50% on some key sectors, including autos, lumber, aluminum and steel.
“Our base case forecast assumes those sectors that currently have free trade access to the U.S. are able to retain it either because we reach a deal or because the talks drag on and the status quo is maintained,” Shenfeld added.
“But should a broader list of industries be hit with tariffs than is now the case, growth would be weaker and the BoC would be forced into further rate cuts.”
Last week, Prime Minister Mark Carney agreed with Chinese leader Xi Jinping to reduce certain tariffs between the two countries in an attempt to reset the relationship and sought new partnerships in the Middle East to reduce heavy economic reliance on the U.S.
Canada’s economic growth is expected to have slowed sharply to an annualized pace of only 0.3% last quarter, the poll showed, after growing 2.6% in the third quarter.
The economy will gradually pick up pace to hit about a 2% rate of growth by the end of 2026, poll medians showed. Growth will average 1.2% and 1.8% in 2026 and 2027, respectively, after a 1.7% rise last year.
“We think the economy is at a turning point for the better, given it’s very interest rate sensitive. There were many, many basis points of rate cuts already. Those will continue to flow through to support the economy this year,” said Claire Fan, a senior economist at RBC, which also was one of the most accurate forecasters last year.
Canada’s inflation is forecast to remain around the midpoint of the BoC’s 1%-3% target range.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Mumal Rathore; Editing by Ross Finley and Paul Simao)
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