The Bank of Canada held its overnight rate steady this morning at 2.25%. In the statement accompanying the decision, the Bank noted that the Canadian economy will likely continue to be challenged over the next year by trade volatility, but it expects underlying domestic demand to firm up in 2026.
On inflation, the Bank expects CPI inflation to remain close to its 2% target, though it still assesses underlying or core inflation at closer to 2.5%. Overall, the Bank judges the current level of its policy rate to be the right level to keep inflation at its target while helping the economy adjust to the current period of global trade upheaval.
The complexities of global trade tensions still mean some downward pressure on growth coupled with potential upward pressure on inflation. Policymakers are acting with caution. The Bank continues to signal that its policy measures cannot offset the economic impacts of trade wars. While concerns over tariff-driven inflation are less significant after Canada dropped most retaliatory tariffs on U.S. goods, inflation remains above the 2% target.
Recent revisions to Canadian GDP and a strong third-quarter headline GDP number paint a rosier picture than underlying reality. Market sentiment has shifted, with financial markets anticipating a rate hike in 2026. This change has influenced bond markets, pushing the 5-year bond yield above 3%.
If this level holds, the sluggish housing market may face rising fixed mortgage rates in the new year.
source: BCREA
Posted by Adam Chahl on
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