By Swikblog News Desk | December 5, 2025
In a shift that has rippled across global markets, the Bank of Canada (BoC) is now widely expected to keep interest rates unchanged until at least 2027, according to a comprehensive Reuters poll of economists. The consensus marks a significant departure from earlier expectations that the central bank would continue its rate-cutting cycle through 2025. Instead, policymakers appear increasingly unwilling to risk undoing progress on inflation at a moment when price pressures are receding more slowly than anticipated.
The announcement resets expectations for households, lenders, and investors who had positioned themselves for a more accommodative monetary landscape. It also follows a period in which Canada’s major banks—most notably TD, which recently reported a surprise profit surge and a dividend hike—signalled improving resilience in the financial system, adding to the BoC’s confidence in maintaining a firmer stance. Read our full report on TD Bank’s latest earnings here.
A Return to Monetary Restraint — and Why Inflation Is Not Cooperating
The Bank of Canada’s hesitation to cut further is rooted in what officials call the “last mile” of the inflation fight—an area where global central banks, from the U.S. Federal Reserve to the European Central Bank, have also slowed their pace. Although Canada’s headline inflation has retreated from its post-pandemic highs, the more persistent components—services inflation, shelter costs, and wage growth—remain uncomfortably elevated.
BoC models show that the output gap, once deeply negative in 2023–24, is narrowing faster than expected as labour markets remain tight and productivity gains remain weak. This gives policymakers limited room to stimulate without reigniting demand. Indeed, the central bank’s Monetary Policy Report, available on the Bank of Canada website, makes clear that the “balance of risks remains skewed toward inflation persistence,” particularly in provinces where shelter costs dominate consumer spending.
Why Canada Faces a Longer Hold Than Other Economies
Canada’s inflation dynamics differ from those in the United States. While the Federal Reserve has benefited from stronger productivity growth and a deeper labour pool, Canada’s supply-side constraints—from housing shortages to slowing immigration absorption—make its inflation more sensitive to rate changes. As a result, the BoC is reluctant to loosen policy prematurely, especially with household debt levels among the highest in the G7.
A Reuters analysis of international rate markets shows that traders now assign less than a 20% probability of a Canadian rate cut before late 2026, whereas expectations for U.S. easing remain more fluid. The ECB, similarly grappling with structural inflation, is also signalling caution. Canada, in many ways, sits between the two, with inflation too sticky for comfort and growth too fragile for aggressive tightening.
Markets React as Bond Yields Jump and the Yield Curve Reprices
The BoC’s perceived pivot has triggered swift reactions in financial markets. Government bond yields climbed, particularly at the two-to-five-year range, as traders repriced the path of policy. The Canadian yield curve—previously steepening in anticipation of cuts—has flattened again, reflecting a belief that monetary easing will arrive later and less forcefully than expected.
For equities, the response has been uneven. Banks gained on the prospect of more stable net-interest margins, while rate-sensitive sectors such as real estate investment trusts and consumer discretionary stocks fell. According to Reuters’ market desk, futures markets now price less easing in Canada over the next two years than in any other G7 country except the UK.
The Housing Market: A Slow Thaw, Not a Spring Bloom
Canada’s housing market—arguably the most rate-sensitive in the developed world—will feel the implications most acutely. Economists expect a “slow-thaw” recovery rather than a rapid rebound. Demand is returning as buyers adjust to the reality of higher borrowing costs, but supply continues to tighten, particularly in Toronto, Vancouver and smaller high-growth cities such as Halifax and Kelowna.
Crucially, Canada faces the biggest mortgage-renewal wave in its history between 2025 and 2027. Borrowers who locked in ultra-low pandemic-era rates will confront payment increases of 20–35%, depending on loan structure. This cohort’s financial strain remains one of the Bank’s top concerns. A premature rate cut could reignite speculative behaviour in the market, worsening affordability without meaningfully improving household resilience.
Labour Markets and the Productivity Puzzle
Canada’s labour market continues to defy expectations. While job creation has cooled, unemployment remains relatively low, and wage growth—in the 3.5–4.5% range—still outpaces inflation in several sectors. This dynamic leaves the Bank uneasy: high wage momentum is difficult to reconcile with the inflation target, particularly in an economy where productivity has been flat for nearly a decade.
Economists interviewed by Reuters note that unless productivity improves, even moderate wage growth will keep service-sector inflation elevated. This is one reason the Bank of Canada anticipates a longer road back to 2% compared with earlier forecasts.
Global Spillovers: Why Canada Cannot Cut Alone
Because Canada is a small open economy, the BoC must also consider global capital flows. Cutting too aggressively ahead of the Federal Reserve risks weakening the Canadian dollar, raising import prices and thus worsening inflation. The Bank learned this lesson in 2015–16, when an unexpectedly weak loonie amplified the cost of traded goods.
With the U.S. economy still outperforming its peers and interest rates remaining comparatively high, Canada has little room to diverge. Any rate differentials that widen too quickly could force the BoC to reverse course or tolerate renewed inflation pressures via currency depreciation.
What Households and Businesses Should Expect Between Now and 2027
For households, the environment ahead will be one of longer-lasting elevated borrowing costs. Debt-servicing ratios are likely to climb as mortgage renewals continue, while discretionary spending may weaken further into 2026. Retailers, auto dealers and small businesses reliant on credit will feel the tightening most directly.
For savers, however, the news is more positive. High-interest savings accounts and GICs are likely to retain competitive returns through 2026, supporting long-term financial planning.
Corporations will face a tougher credit landscape, particularly in real estate development and construction—two industries already slowed by financing constraints and labour shortages. Yet if immigration remains strong and government infrastructure spending continues, Canada may avoid the steeper downturn markets feared earlier this year.
Three Risk Scenarios to Watch
1. The Inflation-Persistence Scenario (Most Likely)
Inflation falls, but slowly. Services inflation remains stubborn, and shelter costs remain structurally high. No rate cuts until mid-to-late 2027.
2. The Hard-Landing Scenario
A sharp rise in unemployment or a housing-market correction could force the Bank to cut earlier—regardless of inflation risks. This remains a minority view among economists.
3. The Productivity-Surge Scenario (Least Likely)
Stronger productivity, immigration absorption and technological investment could bring inflation to target sooner, allowing cuts by late 2026.
Canada’s Monetary Future Hinges on Structural Fixes
What the Bank of Canada confronts today is not merely cyclical inflation but a set of structural issues—from housing undersupply to lagging productivity—that will dictate policy options for years. Rate cuts alone cannot fix these imbalances. Without broader economic reforms, Canada’s return to pre-pandemic borrowing costs may take far longer than the public expects.
