The Bank of Canada is widely expected to leave lending rates unchanged this week, say several economists, who also believe a rate hike is more likely than a cut in the coming months.
This comes as consumers struggle with the high cost of living and recent economic data suggested a technical recession.
The Bank of Canada has kept its key interest rate at 2.25 percent since October 2025, even though US tariffs and the Iran war have weighed on the economy and the labor market.
“For the first time in a long time, the Bank of Canada’s next move doesn’t seem so obvious,” Clay Jarvis, mortgage expert at NerdWallet Canada, said in a note.
“Under normal circumstances, today’s struggling economy might require the stimulus of a rate cut. But it’s hard to justify cutting the federal funds rate when a pointless war is fueling inflation.”
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Royal Bank of Canada Economics said in a note from deputy chief economist Nathan Janzen and economist Abbey
“This year you will see a gradual improvement in the per capita economic situation and the unemployment rate will fall,” Janzen told Global News.
“It would be good news if she [the Bank of Canada] will increase in 2027 because this means that the economic situation is more stable than today.”
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The parliamentary budget officer released an economic outlook on June 4 and said he also expected interest rates to rise next year.
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“As supply disruptions caused by the Middle East conflict ease and inflation returns toward the Bank of Canada’s 2 percent target, we expect the Bank to gradually raise its key interest rate until it reaches 2.50 percent in mid-2027 and returns to its estimated neutral level of 2.75 percent by the end of 2027,” the forecast said.
Other economists believe those increases could come even sooner than next year.
“The Bank of Canada will shrug its shoulders for now this week as it remains on hold and in watch mode,” Derek Holt, senior vice president and head of capital markets economics at Scotiabank, said in a written statement.
“A number of developments are likely to occur over the course of 2026 [July through December] This could persuade the BoC to accede to our long-held interest rate hike demand.
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“Our forecast is 50 basis points [0.5 per cent] of increases in the fourth quarter of 2026 [October through December] and another in early 2027, ending at a nominal key interest rate of three percent.”
How the Bank of Canada sets interest rates
More on the topic of economics More videos
The Bank of Canada’s mandate and primary responsibility is to “promote the economic and financial well-being of Canada.” Its main lever that can influence changes in the economy is adjusting its monetary policy – essentially changing the cost of borrowing for Canadians.
Cutting interest rates can boost economic growth by making borrowing for things like mortgages and business loans more affordable. However, if interest rates are too low, inflation could lead to higher prices for goods and services.
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An increase in interest rates increases the cost of borrowing and potentially slows the economy. This often happens when inflation gets out of control. However, if interest rates are too restrictive, there is a risk of a recession if the economy slows too much.
The balance of monetary policy is calculated by the bank’s governing body at every monetary policy meeting, including this week. These meetings are held regularly to determine whether interest rates should remain the same, increase or decrease based on current economic data and analysis.
1:36
A debate arises over whether Canada is experiencing a recession
Gross domestic product (GDP) is one of the key indicators the Bank of Canada uses to set monetary policy, and although the latest report showed Canada is in a technical recession, Deputy Governor Carolyn Rogers has warned: “I think we need to be careful not to put too much weight on any indicator.”
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Rogers also stressed that preliminary GDP estimates in April suggested a slight recovery in the economy, and this is another reason to be cautious about using the “recession” label.
The labor market showed some positive signs Friday: May’s labor force survey showed the unemployment rate fell to 6.6 percent from 6.9 percent in April and 88,000 new jobs were created.
Although gas prices had led to higher headline inflation of 2.8 percent in April, the core or underlying metrics had actually fallen from 2.2 to two percent.
The bank’s target corridor for inflation is one to three percent.
“Some will cite our newly revealed technical recession as justification for a cut, but I think inflation is still the bank’s priority,” Jarvis said. “If that is the case, they will maintain the nightly rate next week and maintain a status quo that feels increasingly uncomfortable.”
The Bank of Canada is expected to announce its updated policy at 9:45 a.m. Eastern Time on Wednesday, followed by a news conference.
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