The Bank of Canada has made its position crystal clear. With the overnight rate firmly anchored at 2.25% following December’s decision, the central bank is signaling that the era of aggressive rate cuts has ended. As Canadians look toward 2026, understanding what this stability means for mortgages, savings, and the broader economy becomes increasingly important.

The Current State of Play

The BoC held its policy rate steady in December 2025, and all signals point to continued stability in the coming months. The next rate announcement is scheduled for January 28, 2026, and market expectations are remarkably aligned: no movement expected. This represents a significant shift from the rate-cutting cycle that dominated 2025, marking a transition into a holding pattern that analysts expect could extend well into the year.

The current policy rate of 2.25% translates to a prime lending rate of 4.45% for borrowers, which influences everything from mortgage rates to credit card charges. This level represents what economists describe as the “neutral” rate for Canada, a theoretical sweet spot where monetary policy neither stimulates nor restricts economic activity.

Why the BoC Isn’t Moving

Several economic factors explain the central bank’s cautious stance. Core inflation remains sticky, hovering around 3 percent, which is notably above the Bank’s 2 percent target. While headline inflation has shown more improvement, the underlying momentum in price growth suggests that premature rate cuts could risk reigniting inflationary pressures.

Labour market dynamics also play a crucial role. Though recent data shows improvement with the unemployment rate falling to 6.5 percent, the Canadian job market remains choppy. The BoC is taking a measured approach, allowing time to assess whether the labour market recovery will be steady or subject to unexpected volatility.

Perhaps most significantly, Canada faces structural economic headwinds. Population growth has slowed dramatically due to immigration policy adjustments, which means fewer new workers entering the labour force each month. This demographic challenge complicates the traditional relationship between employment growth and economic health, requiring the BoC to carefully analyze per-capita metrics rather than simply looking at overall growth figures.

What About Rate Hikes?

While immediate rate cuts appear off the table, the possibility of increases is gaining serious consideration. Analysts increasingly recognize that if economic conditions strengthen or inflation proves more persistent than expected, the BoC could shift from holding to hiking as early as 2027. Some market participants are even pricing in a modest probability of increases occurring in late 2026, should data warrant such action.

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The Bank itself has acknowledged this asymmetric risk. Officials have noted that stronger-than-expected activity could accelerate inflation, potentially pulling rate hikes forward. This forward guidance essentially tells the market: expect stability now, but remain prepared for tightening if circumstances change.

Economic Growth Remains Modest

The BoC’s economic forecasts reveal modest expectations for growth. The central bank projects GDP expansion of just 1.2 percent for 2026, representing a slowdown from 2025’s 1.7 percent growth. This deceleration reflects the population growth challenge mentioned earlier, where fewer new residents means less overall economic expansion.

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However, there’s a more encouraging story hiding in these numbers. Per-capita GDP, which measures living standards per person, is expected to grow at 1.3 percent in 2026, marking the second consecutive annual increase after declines in 2023 and 2024. This suggests that while the economy isn’t expanding at a breakneck pace, individual Canadians are slowly gaining economic ground.