Royal Bank of Canada (RBC) economist Claire Fan notes that the Bank of Canada (BoC) kept its overnight rate at 2.25% and signaled that a policy rate near current levels remains appropriate if its base-case outlook holds. The Bank and RBC both expect moderate Canadian growth, gradual slack absorption, and no rate changes in 2026, with hikes only in 2027 as conditions tighten.

BoC holds as risks stay balanced

"As expected, the Bank of Canada held the overnight rate at 2.25% at its third meeting of 2026 (a fourth consecutive hold) and reiterated that, should the central bank's base-case economic outlook hold true, a policy rate close to current levels remains appropriate."

"Excess supply in the economy still renders the current policy setting as "appropriate" at the lower end of the estimated ‘neutral range’ (unchanged from previous estimates at 2.25% to 3.25%) but this is also contingent on economic data evolving in line with their base case forecast, which is very much consistent with our own."

"Overall, both the BoC and we expect moderate economic growth this year to lead to a gradual absorption of economic slack over time."

"We continue to expect no change in the overnight rate in 2026 before it edges higher in 2027, alongside a narrowing output gap and downdrift in the unemployment rate."

"Relative to that base case, the BoC identified two-sided risks for interest rates: significant tariff increases from the U.S. could prompt rate cuts, while a longer-lasting energy price shock than currently assumed could stoke broader inflation pressures and necessitate consecutive policy rate increases."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)