It is expected to keep its policy rate at 2.25 percent on Wednesday after stronger-than-expected job growth and better third-quarter growth.
“It is clear that there is no serious or compelling reason to cut rates further at this time,” said Jimmy Jean, chief economist at Desjardins Group.
After contracting 1.6% in the second quarter, the Canadian economy grew 2.6% in the third quarter, well above the Bank of Canada's forecast of 0.5%. Factors driving the increase include federal defense spending and an improvement in the trade balance compared to the previous quarter.
“It's a soft economy, but it's definitely not in recession,” Jean added. “We knew that tariff escalation would lead to a lot of volatility in the numbers, and that's what we're seeing.”
Additionally, Friday's jobs report showed that
also holding up better than expected, with the Canadian economy adding 54,000 jobs, mostly part-time, and the unemployment rate down 0.4 percentage points to 6.5 percent. The economy has added 181,000 jobs since September and the unemployment rate fell 0.6 percentage points.
“Labor markets also showed more signs of stabilization, with employment rising by 54,000 in November after already strong gains in September and October,” Royal Bank of Canada economists Nathan Janzen and Claire Fan said in a note. “Weakness still exists in tariff-exposed manufacturing industries, but economy-wide layoffs remain low.”
Core inflation in Canada is holding steady at around three percent, according to last month's headline.
(CPI) rose 2.2 percent in October.
“The latest inflation data shows worrying signs about the sustainability of rents,” Jean said. “We have seen some cooling due to lower demand due to population growth, but it is a little more severe than we expected at this point.”
He added that at this stage the risks of rising inflation cannot be discounted.
A growing number of economists expect the central bank to keep its policy rate at 2.25 percent for most of 2026.
Bank of Canada Governor Tiff Macklem
signaled that the bank's easing cycle could be completed if the economy performs according to its forecasts. The bank's discount rate is currently at the lower end of the estimated neutral range.
Following Friday's jobs data, markets increased their bets that the next step will be a rate hike next year. Statistics Canada also recently released significant revised GDP data for 2022, 2023 and 2024, which showed that the Canadian economy grew 1.7 per cent more than originally estimated over those years.
But Jeremy Kronick, vice president of economic analysis at the CD Howe Institute, said forecasts of a rise could be premature and would depend on where the bank sees potential output, which is the maximum sustainable level at which the economy can operate without accelerating inflation.
“If the bank revises potential output upward, there is nothing to suggest inflation will be higher and you don't need to raise the rate,” he said. “If the potential is the same and there is additional resilience on the demand side that you think may continue, then you may have to go higher.”
Canadian Imperial Bank of Commerce
Chief economist Avery Schoenfeld said the economy would have more room for additional non-inflationary output if more Canadians were employed.
“However, unemployment remains higher and employment remains lower than needed to contain inflation,” he said in a note.
He added that the bank “doesn't need to think about moving to higher interest rates until we make much more progress in filling these gaps in our labor market.”
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