{"id":5791,"date":"2025-12-12T15:13:36","date_gmt":"2025-12-12T15:13:36","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=5791"},"modified":"2026-04-02T23:28:30","modified_gmt":"2026-04-02T23:28:30","slug":"boc-on-hold-while-the-fed-moves-towards-the-sidelines","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/boc-on-hold-while-the-fed-moves-towards-the-sidelines\/","title":{"rendered":"BoC on hold while the Fed moves towards the sidelines"},"content":{"rendered":"\n
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Highlights:<\/strong><\/h4>\n\n\n\n
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Canada\u2019s gross domestic product growth for 2025 is tracking above prior expectations, and the unemployment rate below. Our cautiously optimistic outlook for Canada\u2019s economy remains intact.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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We still don\u2019t see the Bank of Canada cutting the overnight rate further. The next move is more likely to be a hike although we don\u2019t expect that until 2027.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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U.S. forecasts are in a holding pattern, pending delayed data releases. Stagflation lite remains our key theme with the unemployment rate and core inflation expected to edge higher in 2026.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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With a December cut in the books, we expect the U.S. Federal Reserve to try to squeeze in only one more rate cut in 2026 before holding steady for the remainder of the year.  <\/p>\n<\/div>\n<\/div>\n\n\n\n

Issue in focus:<\/strong><\/h4>\n\n\n\n
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It\u2019s still early, but we now have enough data to track how heavily tariffed Canadian industries have fared since the U.S. measures were imposed. We break down trends in the auto, metals and lumber industries for production, employment and selling prices this year.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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Forecast changes:<\/h3>\n\n\n\n

Labour market green shoots support Canadian forecast<\/h4>\n\n\n\n

No single data point should change our view of the economy\u2014particularly not the notoriously volatile monthly labour market data. But consecutive upside employment surprises in Canada, along with a substantial 0.6 percentage point drop in the unemployment rate between September and November, added conviction to our cautiously optimistic outlook on the Canadian economy.<\/p>\n\n\n\n

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Cautious is the key word. Uncertainty about Canada-U.S. trade remains, sharply slower population growth will weigh on aggregate output, and weak productivity growth persists as a structural challenge. Still, growth in the economy has tracked closer to the optimistic end of possible scenarios from April, and 275 basis points of BoC rate cuts Since June 2024 will continue to help with recovery from a cyclical trough.<\/p>\n\n\n\n

Without another external shock, our Canadian outlook remains for soft GDP growth, a gradual drift lower in the unemployment rate, and sticky underlying inflation above the BoC\u2019s 2% target in 2026.<\/p>\n\n\n\n

Next eventual BoC move is more likely a hike<\/h4>\n\n\n\n

That outlook, combined with the overnight rate already at the lower bound of the neutral range, makes it challenging to make a case for additional easing from the BoC. Indeed, we think the next move from the central bank is more likely to be a hike, although the timing is uncertain.<\/p>\n\n\n\n

For now, we maintain our forecast that the BoC will hold the overnight rate steady at 2.25% throughout 2026 before raising it back up to the top of the 2.25% to 3.25% neutral range in 2027.<\/p>\n\n\n\n

Upside risks to our base case\u2014stemming from stronger-than-expected consumer purchases<\/a> or unwinding of trade headwinds due to a shifting U.S. political landscape\u2014could add to growth and inflation, narrow the output gap faster than expected, and pull rate hikes forward into 2026.<\/p>\n\n\n\n

U.S. macro forecast in a holding pattern<\/h4>\n\n\n\n

Limited available U.S. economic data since our last forecast update mostly pointed to further, but still gradual softening in the labour market. We continue to expect conditions will get worse before they get better, and the unemployment rate will edge higher to peak at 4.6% in 2026, before gradually dropping lower.<\/p>\n\n\n\n

Our prior forecast assumed a significant unemployment spike in October due to federal workers that were furloughed during the U.S. government shutdown. With that data release now cancelled, we have reverted our Q4 unemployment rate forecast to 4.5%, slightly above September’s 4.4%.<\/p>\n\n\n\n

Zooming out of the current quarter, a worsening stagflation lite (slower growth, higher prices) remains one of the key themes of our U.S. outlook<\/a> in 2026. We expect it will continue to present challenges to the Fed that seeks to balance risks around both the inflation and the employment side of their mandate.<\/p>\n\n\n\n

Fed still expected to be on hold through most of 2026<\/h4>\n\n\n\n

With a third consecutive cut in December that lowered the Fed Funds to neutral range, we see the scope for further downward moves from the Fed as becoming more limited, particularly as we expect core inflation to rise to 3.3% by mid-2026 and the unemployment rate to normalize to still historically low levels.<\/p>\n\n\n\n

Between now and the next Fed meeting in January, a deluge of delayed economic data releases should provide more clarity on the state of U.S. labour conditions and inflation after the government shutdown. Consequently, they could materially impact the timing and magnitude of future easing.<\/p>\n\n\n\n

For now, we\u2019ve penciled in only one more rate cut from the U.S. central bank in line with their Summary of Economic Projections. Risks are that the window for further rate cuts closes faster than hoped for.<\/a><\/p>\n\n\n\n

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