The Bank of Canada says elevated levels of economic and geopolitical uncertainty were behind its decision to

hold interest rates for the second time at 2.25 per cent, and that uncertainty is bleeding into economist predictions that now run from cuts to hikes to holds for 2026.

The central bank stuck with its line from previous decisions in September and December that rates were “at about the right level to keep

inflation close to two per cent while helping the economy through this period of structural adjustment.”

But it also said “uncertainty is heightened” and it is prepared to respond if risks change.

Here’s what economists think the Bank of Canada’s decision means for

‘Rate are skewed to the downside’ — Desjardins

interest rates and the economy. “The Bank of Canada’s description of economic conditions is now much more guarded,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note.

Policymakers said Canada’s economy likely stalled in the fourth quarter, but they expect growth in the first quarter, though there are soft spots of economic weakness, including uncertainty around the Canada-United States-Mexico Agreement (

CUMSA ), “elevated” unemployment and businesses that appear unwilling to hire or make capital investments.

But Mendes said the Bank of Canada seemed less worried about inflation since the January Monetary Policy Report said inflation expectations have eased, with the three-month annualized rate falling below two per cent, which is policymakers’ target.

“That said, the communiqué made more of a point to say that this guidance is conditional on the economy evolving broadly as expected; a nod to the significant uncertainty embedded in the forecast,” he said.

The Bank of Canada’s governing council said it would be difficult for them to predict the timing or direction of the next interest rate move.

“This is all consistent with our view that the Bank of Canada sounded too certain late last year about the trajectory of the economy and rates, which has now been corrected,” Mendes said. “We continue to believe that the risks to interest rates are skewed to the downside in the first half of this year.”

Rates ‘mildly stimulative’ — Oxford Economics

The current 2.25 per cent interest rate sits at the low end of the Bank of Canada’s neutral range of 2.25 per cent to 3.25 per cent and is “mildly stimulative for the economy,” Oxford Economics Ltd. economists Tony Stillo and Michael Davenport said in a note.

The central bank is forecasting the economy to expand 1.1 per cent in 2026 and 1.5 per cent in 2027 and for inflation to remain at its target.

“Like most aspects of the Canadian outlook, the path ahead for the Bank of Canada will hinge on U.S.-Canada trade policy and the upcoming renegotiation of (CUSMA),” they said.

For the moment, Stillo and Davenport are calling for policymakers to hike interest rates early next year, with “economic forecasts on a more firmer footing,” and to eventually lift rates back to a neutral level of 2.75 per cent by mid-2027.

“In the unlikely event that the trade agreement falls apart entirely, we expect the Bank of Canada would drop the policy rate deeper into stimulative territory for an extended period,” they said.

‘Nothing here to shift the call’ — BMO

“The Bank of Canada suggests that the outlook is too uncertain to seriously revise the economic view and/or to give much guidance on when and where rates are going next,” Douglas Porter, chief economist at BMO Capital Markets, said in a note.

He said there are signs that policymakers are favouring a cautious stance, given their estimate for 2026 gross domestic product (GDP) undershoots economists’ calls — 1.1 per cent versus 1.4 per cent — and they are much more hesitant about 2027 since they are calling for 1.5 per cent growth versus BMO’s forecast for 2.2 per cent.

Porter also said estimates of the output gap stayed the same at minus 1.5 per cent to minus 0.5 per cent, meaning slack remains in the economy.

But he said the Bank of Canada tightened up its language on inflation, saying it was close to its two per cent target rather than around 2.5 per cent.

“There is really nothing here to shift the call that the Bank (of Canada) will be on hold for the rest of 2026, although we continue to assert that if there is a move, it’s much more likely to be a rate cut rather than a hike this year,” he said.

  • Bank of Canada holds interest rate at 2.25%, but is ‘monitoring risks closely’
  • Bank of Canada survey shows growing share of Canadian businesses gaining trade beyond U.S.