Big bank economists believe 2026 could bring rate hikes for Canadians, but timing is uncertain
With markets pricing in a Fed rate cut at its FOMC meeting on Wednesday – and convincingly too at around 92% - the trajectory for Canadian interest rates is less certain.
While it’s unlikely that the Bank of Canada will make any changes when it meets this week, big bank economists have been opining on potential divergence between policymakers north and south of the border, as respective economies differ.
While the Fed cut is not definite, given that US inflation remains hotter than it should be, a third consecutive cut is widely expected, but RBC Economics’ Nathan Janzen and Claire Fan say that the BoC’s decision will reflect last week’s jobs stats, better-than-expected GDP data, and no real change in household debt service ratio while financial assets and net wealth have gained. They say that all this suggests that the BoC will opt for a hold on Wednesday and conditions will not point to any cuts in 2026.
Andrew Hencic at TD Economics highlights the positives in the most recent labour report, but notes that there is still slack in this regard, while trade remains tainted by tariffs. The bank also expects a rate hold by the BoC this week.
But what about the chance that rates will be hiked next year?
CIBC’s Andrew Grantham is among those leaning in to talk of rate hikes by the BoC in 2026 while noting that the labour market may not be quite as good as the headline stats suggest, given the concentration of jobs and a decline in participation which made unemployment appear less of an issue.
He does not expect any further rate cuts but is dovish on rate hikes which he does not believe will be appropriate to the economic conditions until the end of next year. Any hike is also seen as coming late in 2026 by BMO’s Doug Porter.
However, Scotiabank’s Derek Holt believes that rates could be increased sooner. In his reaction to the jobs report he wrote:
“I'm starting to think of an earlier hike than late next year. Ripping jobs. Less slack than previously estimated due to GDP revisions. Wage settlements are still going strong in a very different job market than stateside with so many unionized workers striking 4–5 year contracts with make-up pay gains well above 2% inflation.”
