Canada's Economy Faces Sluggish Growth Ahead of Rate Hikes

Canada's economic growth is expected to be sluggish in the coming year due to trade uncertainty and slowing immigration levels, according to a recent report by Capital Economics. The report suggests that these factors will likely limit inflation in the near-term, which could in turn influence the Bank of Canada's interest rate hikes.

The Bank of Canada has been keeping its benchmark interest rate at 2.25% for all of 2026 as it assesses the impact of the US trade dispute and war in Iran on its economic outlook. Financial markets have been anticipating interest rate hikes, driven by concerns over high oil prices and their potential to fuel persistent inflation.

However, economists at Capital Economics argue that the central bank will only raise the policy rate to 2.75% with a pair of quarter-point hikes starting next year. They believe the Bank of Canada will resist further rate increases in order to avoid hampering economic growth.