Bank of Canada seen holding interest rate steady through 2026 as inflation cools

The Bank of Canada will keep interest rates steady next year, say economists. Photo by THE CANADIAN PRESS/Sean Kilpatrick

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Canada’s inflation rate and its underlying data have economists predicting it will be quite a while before the Bank of Canada moves the overnight interest rate.

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On Monday, Statistics Canada reported that the consumer price index held steady at 2.2 per cent in November, though food inflation climbed at its fastest rate since December 2023.

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Meanwhile, measures of core inflation showed signs of cooling.

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Here’s what they had to say about November’s inflation data:

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Bank of Canada ‘can take comfort’: Desjardins

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Royce Mendes, managing director and head of macro strategy at Desjardins, said the Bank of Canada “can take comfort” in avoiding a stagflationary environment.

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“We continue (to) believe that downside risks to the economy and inflation will be more pertinent over the next few months, with lingering uncertainty about CUSMA [Canada-United-States-Mexico Agreement] weighing on activity and fiscal stimulus not a major factor until later in the year,” he said in a note.

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Overall, Mendes said the “only real fly in the ointment” is the rise in the number of categories in which prices increased more than three per cent.

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‘Getting closer’: TD Bank

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Leslie Preston, managing director and senior economist with TD Bank, said November’s CPI data underscores why the Bank of Canada has not focused on recent inflation trends.

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“Underlying inflation is still above the two per cent target, but it is getting a lot closer in recent months,” she said in a note.

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“Looking ahead, Canadian inflation is likely to see some choppiness. December’s inflation will be boosted by comparisons to last year’s GST holiday. But overall, we expect inflation to moderate to the Bank’s target over the next year, as past inflation problem areas, like rents, continue to cool.”

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Interest rates to remain flat in 2026: CIBC

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Andrew Grantham, senior economist at Canadian Imperial Bank of Commerce, said that while many core measures of inflation are down compared to October, they are still too high for the Bank of Canada to cut rates, and may not be high enough for a hike any time soon either.

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‘We continue to forecast the Bank of Canada to hold its overnight rate steady at its current level throughout next year,’ he said.

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Rate holds coming, with room to trim: Rosenberg

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David Rosenberg, founder of Rosenberg Research and Associates Inc., echoed the CIBC report and also anticipates interest rates to remain the same in the immediate future.

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“The bond bears and policy hawks can take a chill pill,” he said. “The fact that the markets are pricing in the next (Bank of Canada) move as being a hike is frankly rather laughable.”

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Inflation in the residential real estate market also gives the Bank of Canada room to trim if needed, Rosenberg added.

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CPI rent inflation softened in the month to 4.7 per cent and the homeowner’s replacement cost deflated at a -1.6 per cent year-over-year rate.