Bank of Canada’s Rate Outlook#
The Bank of Canada (BoC) is expected to hold its policy interest rate steady at 2.25% until 2026. This forecast comes from a report by BofA Securities, highlighting that ongoing geopolitical tensions and trade uncertainties are influencing the central bank's decision to maintain its current stance.
Impact of Rising Oil Prices#
Recent increases in energy prices, particularly due to military actions in Iran, pose significant risks to Canada’s economic outlook. Higher oil prices can lead to increased growth and inflation in Canada, making it less likely for the BoC to consider lowering rates. BofA economist Carlos Capistran noted that these shifts in the economy could counteract any potential rate cuts.
Economic Indicators and Labor Market#
Despite a contraction in Canada’s GDP in late 2025, the rise in crude oil prices is seen as a structural offset to this weakness. The labor market presents a mixed picture; while the unemployment rate has dropped to 6.5%, this decline is attributed to fewer people participating in the workforce rather than an increase in job creation.
Inflation and Market Reactions#
Inflation trends are also crucial for the BoC's future decisions. Although core inflation measures are decreasing towards target levels, BofA warns that a sustained 10% rise in oil prices could increase overall inflation by about 0.4%. Market expectations have started to shift, moving away from earlier predictions of rate cuts in 2026 towards the possibility of rate hikes, reflecting the changing economic landscape.