The Bank of Canada is scheduled to make its next decision about interest rates on Dec. 10, which will be its last chance this year to move the rates up, cut them, or hold them steady.
Most economists are expecting the central bank to hold its benchmark interest rate at 2.25 per cent after several mostly positive reports on the economy and job market, although another cut is still possible.
“So far, all that we’ve seen on the economic data is that it’s coming in a bit stronger, if anything, than the Bank of Canada was projecting. So I think that definitely cements a hold at this meeting,” says Claire Fan, a senior economist at Royal Bank of Canada.
Central bankers meet eight times per year to discuss monetary policy and provide an update to benchmark lending rates. This essentially sets the bar for commercial lenders and banks to build their own rates for their clients.
“No policy changes are expected at this meeting. No change is expected for the next several meetings at a minimum,” said Derek Holt, vice-president and head of Capital Markets Economics at Bank of Nova Scotia, in a statement.
Holt adds that “the key to success,” for Gov. Tiff Macklem at the Bank of Canada, is “to walk away from it all without rocking the boat.”
From mortgages to car loans and other lines of credit, customers looking to borrow money will usually pay more or less based on changes to monetary policy determined by the Bank of Canada at these meetings.
Clay Jarvis, a mortgage expert at NerdWallet Canada is also predicting the Bank of Canada will keep rates unchanged this week, which would also mean mortgage rates will likely stay mostly where they are.
“If the Bank surprises us all with a third consecutive rate cut, though, the winter market could be unseasonably warm,” said Jarvis in a statement.
The Bank of Canada delivered four rate cuts so far this year, including at the last two meetings.
Before cutting rates in September and October, the central bank held its key policy rate at 2.75 per cent for three straight meetings amid the uncertainty surrounding the trade war and U.S. tariffs.
The Bank of Canada says its key mandate is “to promote the economic and financial welfare of Canada.”
Another mandate involves keeping inflation within an optimal range of one to three per cent, and adjusting lending rates helps to steer inflation into that range.
Getting monetary policy right can be a fine balancing act for central bankers.
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If interest rates are too high, then prices for most goods and services are often expected to come down as consumers are often able to afford less, but higher rates could also mean it will be more expensive to borrow money, which can lead to job cuts if businesses aren’t able to afford funding to expand or maintain operations.
If rates are too low, businesses may have an easier time borrowing money to expand, which can spur job growth. However, that can also lead to higher prices, which can hurt consumer spending.
To gauge how much to change rates, if at all, the Bank of Canada looks at a handful of economic reports in the weeks ahead of each monetary policy meeting.
The main economic gauges include that of economic output, or gross domestic product (GDP), measuring the rate that prices change, including inflation reports like the Consumer Price Index, as well as the monthly Labour Force Survey that reveals the unemployment rate.
Overall, most of these recent reports have been stable, if not slightly positive.
“Some of the key economic indicators that we’ve gotten since the last Bank of Canada meeting included a pretty big upside in terms of the third quarter GDP numbers and a big drop in the unemployment rate,” says Fan.
“So I think data collectively are starting to tell us that the worst of the trade impact on the economy may have already been behind us.”
The trade war, sparked by U.S. President Donald Trump’s tariff policies, led to shocks that rippled through Canada’s economy.
Tariffs caused prices to rise for some products and services, including steel, automotive and lumber industries, which led some businesses to announce job cuts, including at Algoma Steel.
Although the Bank of Canada has said previously that Canada’s economy has been “weaker” because of the trade war, a recession was avoided in the third quarter after GDP showed a surprising jump following a decline in the second quarter.
A recession is defined most commonly as two back-to-back quarters, or a six-month period where GDP shrinks.
Consumer inflation has also been trending lower in recent months, with October’s report measuring price growth at 2.2 per cent compared to the same month in 2024, and that’s down from 2.4 per cent in September.
On the job front, Canada’s unemployment rate fell for the second straight month in November to 6.5 per cent, after climbing to 7.1 per cent in August — the highest since September 2010.
The positive signs following several rate cuts led the Bank of Canada to suggest at its last meeting that rates are “at about the right level.”
This means interest rates may be high enough that prices are relatively stable, and low enough that the economy can expand, and businesses can thrive while offering stable employment to Canadians.
“Our current base case is for the overnight rate to be holding at 2.25 per cent,” says Fan.
“A lot of that does has to do with the fact that the economy is expected to grow into 2026, but the growth rate isn’t exactly strong by any means.”
Macklem has said that given Canada’s current trajectory for modest, but still positive economic growth, there may be no need to change interest rates anytime soon.
“If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy through this period of structural adjustment,” said Macklem in a statement after the October rate cut.
Fan says Macklem’s analysis is shared by the economic team at the Royal Bank of Canada.
“Similar to the Bank of Canada, we’re also expecting growth in the economy to persist, but not exactly a strong level,” says Fan.
“Given where the overnight rate currently is, which is at 2.25 per cent, that level is at the lower range of what we call ‘stimulative’ territories, kind of the lower end of the Bank of Canada’s neutral range.”
Holt also said Macklem’s comments in October suggested at the time that the Bank of Canada is done cutting rates for now.
“That was about as clear a sign that the Bank of Canada has shifted to the sidelines as one could imagine,” said Holt.
What could change things is if there are more shocks in 2026, similar to earlier in 2025, which could mean another hit to Canada’s economy.
This could mean interest rates will be cut again to provide more breathing room for businesses and consumers.
On the other hand, if Canada’s economy continues to grow, and much faster than originally thought, then the Bank of Canada may even need to raise interest rates to cool the economy down in pursuit of that core goal of keeping inflation slow and steady, between one and three per cent.
Fan says although maintaining a hold at current rates is the most likely scenario for next year, Prime Minister Mark Carney‘s fiscal policies are one of the main “upside” risks for Canada.
This means there is a chance that the economy steamrolls ahead a bit too fast, which can lead to spikes in prices and even rate hikes instead of cuts.
“We’re seeing signs for upside risk, you know, fiscal spending. The budget obviously was quite enormous, and this is a lot of execution risk,” says Fan.
Carney’s budget includes plans to spend billions of dollars on projects aimed at growing Canada’s economy.
“We definitely see risk, more risk essentially of you know, interest rate increases in 2026, if not more than more cuts, essentially. But our base case currently is still for the Bank of Canada to hold steady pretty much throughout next year,” says Fan.
