The
Bank of Canada
is expected to keep its policy rate at 2.25 per cent on Wednesday, after a stronger-than-expected job gains and a better showing for growth in the third quarter.
“It’s pretty clear there is no major compelling reason to cut rates further at this time,” said Jimmy Jean, chief economist at Desjardins Group.
After a 1.6 per-cent contraction in the second quarter, the Canadian economy expanded by 2.6 per cent in the third quarter, way above the Bank of Canada’s forecast of 0.5 per cent. Factors behind the growth include federal defence spending and an improved trade balance compared to the previous quarter.
“This is an economy that is soft, but is certainly not in recession,” added Jean. “We knew the tariff escalation would inject a lot of volatility in the numbers and that’s what we’re seeing.”
In addition, a jobs report on Friday showed the
labour market
is also holding up better than expected, with the Canadian economy adding 54,000 jobs, mostly part-time, and the unemployment rate dropping 0.4 percentage points to 6.5 per cent. Since September, the economy has added 181,000 jobs and the jobless rate has fallen 0.6 percentage points.
“Labour markets have also shown more signs of stabilizing with employment rising 54,000 in November after already firm increases in September and October,” said Royal Bank of Canada economists Nathan Janzen and Claire Fan, in a note. “Weakness still exists among tariff-exposed manufacturing sectors, but economy-wide layoffs have remained low.”
Canada’s measures of core inflation have run persistently around three per cent, with last month’s headline
consumer price index
(CPI) rising by 2.2 per cent in October.
“The last inflation reading you did see worrying signs of stickiness in rents,” said Jean. “We’ve seen some cooling related to easing demand due to population, but it’s a bit stickier than we anticipated at this point.”
He added that the upside risks to inflation cannot be dismissed at this point.
A growing number of economists expect the central bank to hold its policy rate at 2.25 per cent for most of 2026. During the October rate decision,
Bank of Canada governor Tiff Macklem
signalled the bank’s easing cycle may be finished if the economy operates in line with its forecasts. The bank’s policy rate currently sits at the lower bound of the estimate neutral range.
Following Friday’s job numbers, markets increased their bets that the next rate move will be a hike next year. Statistics Canada also recently published significant revisions for GDP for 2022, 2023 and 2024, which showed a Canadian economy expanded 1.7 per cent more during those years than what was originally believed.
But Jeremy Kronick, vice-president of economic analysis at the C.D. Howe Institute, said predictions of a hike could be premature and would depend on where the bank sees potential output, which is the the maximum sustainable level an economy can operate at without accelerating inflation.
“If the bank revises potential output up, then there is nothing that suggests inflation is going to be higher and you don’t need to hike the rate,” he said. “If potential is the same, and there is this additional robustness in the demand side that you think might continue, then you might have to hike.”
Canadian Imperial Bank of Commerce
chief economist Avery Shenfeld said the economy has more room for additional non-inflationary output if more Canadians are put to work.
“But the jobless rate is still higher and the employment rate is still lower than it needs to be to keep inflation at bay,” he said, in a note.
He added that the bank “needn’t give any thoughts about a move to higher interest rates until we’ve made a lot more progress in filling those gaps in our labour market.”
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