After a 25-basis-point cut in March, the Bank opted to hold its key overnight rate steady at 2.75% in both April and June. Now, with Canada’s core inflation stabilizing around 3% and a surprise uptick in job gains last month, economists increasingly expect the central bank to remain on the sidelines for the foreseeable future.
A Balancing Act: Growth vs. Inflation
Traditionally, the Bank of Canada lowers its policy rate to stimulate borrowing and economic activity, especially in times of uncertainty or downturn. However, when inflation risks re-emerge—as they have in recent months—holding or even increasing rates becomes a more prudent move to avoid reigniting price pressures.
While some analysts still anticipate one or two more rate cuts by early 2026, a growing number—including RBC Economics—believe the Bank may have already done enough. RBC’s Chief Economist, Frances Donald, suggests that more rate cuts could be ineffective at addressing the country’s current challenges—namely, trade disruptions and uneven regional growth caused by U.S. tariff impacts.
Tariffs and Regional Disparities
Donald points to a key weakness in blanket rate policy: it impacts all regions uniformly. For example, Windsor, Ontario—where unemployment recently climbed above 11%—might benefit from additional stimulus, whereas Victoria, B.C., with a 3.9% jobless rate, does not need more economic fuel. Fiscal policy, not monetary policy, may be better suited to address localized pain points, particularly in manufacturing hubs hit hardest by trade tensions.
She also emphasizes that the Bank has already delivered 2.25 percentage points in rate cuts over the past year. That support is still filtering through the economy, and now may be the time to let federal fiscal initiatives take the lead—especially with anticipated increases in government infrastructure and defence spending.
Differing Views on What Comes Next
While RBC holds a relatively optimistic outlook, anticipating a rebound in consumer spending and business confidence, other forecasters like Oxford Economics are more cautious. They argue that Canada is already in a mild recession, with rising tariffs and inflationary pressures pushing the Bank of Canada to hold the line at current rates.
Oxford sees inflation returning to 3% by mid-2026 due to supply-chain strain, limiting the Bank’s ability to stimulate further without risking another round of price hikes.
Meanwhile, BMO still projects three more rate cuts, concluding in March 2026—but even their Chief Economist, Doug Porter, concedes the case for fewer cuts is growing. Financial markets seem to agree: pricing in just one more rate cut before the cycle concludes.
Staying in the Neutral Zone
At 2.75%, the Bank’s current rate sits comfortably within its estimated “neutral range”—a level where monetary policy is neither stimulative nor restrictive. That position gives the central bank critical flexibility. If economic data weakens or unemployment climbs further, it has room to cut. But if inflation rears up again, it can hold the line.
Stephen Brown, Deputy Chief North America Economist at Capital Economics, argues that with unemployment still near 7% and output below potential, the Bank may still need to ease further. He sees the rate potentially bottoming out around 2.25%.
But Donald remains confident in the Bank’s current stance, suggesting it may hold steady for the next one to two years, waiting for the next meaningful economic shock—whichever direction that may take.
What This Means for Borrowers and Investors
For Lendworth borrowers and investors, the message is clear: while rates may decline modestly in the coming quarters, the days of sharp cuts are likely behind us. The Bank of Canada appears to be in “wait-and-see” mode—anchored at a middle ground where it can respond nimbly to either inflation or recession signals.
For now, stable rates could bring some predictability to borrowing costs, even as trade uncertainty and regional economic divergences continue to cloud the outlook.
At Lendworth, we remain committed to helping borrowers navigate this evolving environment and assisting investors in identifying secure, income-generating opportunities backed by strong Canadian real estate.
Questions about how current interest rates may affect your mortgage or investment strategy?
📞 Contact us today or visit www.lendworth.ca to learn more.