A rate hike is coming. RBC predicts when.

RBC Senior Economist Claire Fan said the Bank of Canada’s latest decision confirms that its easing cycle has ended, with policy expected to stay on hold at 2.25%, the bottom of the neutral range, through 2026.

In a Dec. 10 report, she said the hold was widely anticipated following upward GDP revisions dating back to 2022 and “a string of positive labour market surprises” that pushed the unemployment rate down to 6.5% in November from 7.1% in September.

Fan said recent data supports a “cautiously optimistic” outlook rather than a fundamental shift. RBC continues to expect a gradual recovery in output and employment, helped by the 275-basis-point rate cuts delivered since June 2024. Governor Tiff Macklem reinforced that message at the press conference, flagging modest growth, slow absorption of slack and a continued bias to hold.

She noted that Canadian growth has tracked near the upper end of the BoC’s earlier projections, supported by CUSMA exemptions shielding goods exports and “underlying resilience” in household spending.

Against that backdrop, Fan expects the BoC is now finished cutting and that the next move is more likely to be a hike. RBC’s base case is for that shift in 2027, though “risks are tilted toward an earlier move.”

The inflation outlook remains the critical swing factor. The BoC’s view that the policy rate is “at the right level” rests on slack in the economy offsetting cost pressures tied to the reconfiguration of global trade. Fan agrees with that assessment but cautioned that firm consumer demand could keep underlying inflation stickier than expected in 2025–26.

The output gap is still negative, meaning supply exceeds demand, but appears smaller than previously assumed. Household spending has also held up and could strengthen alongside improving labour markets, limiting disinflation.

At the same time, she said the cost of “trade reconfiguration” remains an inflation risk. Even without paying U.S. tariffs directly, Canadian firms face higher costs as they secure alternative suppliers or absorb price increases through integrated supply chains.

Overall, Fan sees the balance of risk skewed toward more, not less, inflationary pressure. Should those risks materialize more forcefully, “the probability of BoC rate hikes as early as the second half of 2026 rises,” she said.

-30-