Interest rate cut? No. Interest rate hike? Also no, RBC says

The Bank of Canada held its overnight policy rate at 2.25% at its first meeting of 2026, a widely expected decision that marked a second consecutive hold following December and reinforced the central bank’s view that the current stance remains appropriate near the bottom of the neutral range.

In a note following the decision on Jan. 28, Claire Fan, senior economist at Royal Bank of Canada, said stabilizing labour market conditions, rising fiscal support and easing inflation pressures late last year have reduced the need for further monetary easing. She added that both RBC and the BoC expect those dynamics to persist into 2026.

RBC’s Claire Fan said the case for additional rate cuts is weak, but lingering trade risks and gradually moderating inflation also argue against a near-term shift toward rate hikes…

Comments from Governor Tiff Macklem and the accompanying January Monetary Policy Report pointed to modest economic growth and inflation remaining close to the 2% target, an outlook that Fan said is contingent on a relatively stable trade environment. While per-capita economic conditions are expected to improve, supported by past rate cuts and expanding fiscal measures such as the GST rebate, ongoing trade uncertainty remains a key risk.

Fan noted that while major tariff escalations are not the base-case assumption, renewed tariff threats from the United States underscore that uncertainty will likely remain elevated. As a result, she said the case for additional rate cuts is weak, but lingering trade risks and gradually moderating inflation also argue against a near-term shift toward rate hikes. RBC’s base case is for the BoC to hold the overnight rate steady through the end of 2026.

The January Monetary Policy Report showed little change to the BoC’s medium-term growth outlook. GDP growth projections for 2026 and 2027 were left at 1.1% and 1.5%, respectively, after an upside surprise in third-quarter 2025 growth was offset by a weaker-than-expected outlook for the fourth quarter. Estimates of economic slack were also largely unchanged, with the output gap still projected between -1.5% and -0.5% at the end of 2025.

Fan said potential output growth is expected to slow, based on softer population growth assumptions and weaker business investment amid uncertainty. The BoC now expects potential growth to ease from about 2.3% in 2025 to roughly 1% in 2026 and 2027. Even so, the central bank assumes that below-trend growth will gradually absorb excess supply over the next two years.

On inflation, the BoC continues to expect headline CPI to hover around the 2% target through the forecast horizon, with subdued pricing power from excess supply broadly offset by higher input costs such as commodities, imports and shipping. Trade developments and financial conditions remain the most important risks to that outlook, Fan said.

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