Soft Economy May Limit Bank of Canada's Rate Hikes

The Bank of Canada's interest rate hikes may be limited by the country's soft economy, according to a report from Capital Economics. The report argues that trade uncertainty and slowing immigration levels will likely hold back inflation in the near-term.

The central bank has kept 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 outlook.

Financial markets have increasingly favored interest rate hikes, driven by high oil prices and concerns about persistent inflation. However, economists at Capital Economics believe that the central bank will only raise the policy rate to 2.75% with a pair of quarter-point hikes starting next year, before resisting further increases to avoid hampering growth.