Big Six banks split on 2026 rate path. Here’s what they think

Toronto-Dominion Bank and Bank of Montreal (BMO) signages is seen in the Financial District of Toronto, Monday, Aug. 14, 2023. THE CANADIAN PRESS/Spencer Colby

More cuts? A hike or a hold?

Canada’s largest banks are moving into 2026 with sharply different expectations for where interest rates will land.

The central bank is heading into a year where inflation risks, trade uncertainty, weak productivity and slowing population growth play a big role, economists representing the Big Six told BNN Bloomberg.

The central bank held the rate steady at 2.25 per cent during the latest interest rate announcement on Dec. 10, after cutting the rate four times in the last year.

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Among the six major economists interviewed, two expects rate hikes, one expects cuts, and the rest say Governor Tiff Macklem will sit tight through the entire year.

Who expects a Cut?

BMO: Productivity in Canada is so much behind the U.S.

BMO is expecting a rate cut below the neutral rate, either two per cent or lower, to 1.75 per cent, Earl Davis, head of fixed income and money markets at BMO Global Asset Management told BNN Bloomberg.

He says the biggest risk to his forecast is uncertainty around the Canada-United States-Mexico Agreement (CUSMA) or a price hike in oil prices.

“I don’t think anything would make them raise interest rates if I’m being quite honest, just because the productivity in Canada is so much behind the U.S.,” said Davis.

“Also, you have to remember, if they raise the interest rates, it most likely strengthens the Canadian dollar, and I think they would prefer the Canadian dollar to remain around these levels or even weaker, because it’s the natural balancer.”

Davis said more global companies are likely to open a business, like a manufacturing plant, because of the underperforming Canadian economy and weak Canadian dollar.

The opposite is true if Canada raises interest rates. It will strengthen the Canadian dollar and deter international investors.

“I do think the Bank of Canada will add additional stimulus to the Canadian economy by having an overnight interest rate that is in the easing zone, outside of neutral,” said Davis.

Who expects a rate hike?

Scotiabank: Still concerned about inflation dynamics

Scotiabank expects the Bank of Canada to raise its key interest rate by 50 basis points in the second half of 2026.

This will bring the policy rate back to 2.75 percent, the midpoint of the neutral range, Jean-François Perrault, chief economist for Scotiabank told BNN Bloomberg.

“We’re still kind of concerned about inflation dynamics,” said Perrault.

He points to wage growth, weak productivity and the recent depreciation of the Canadian dollar as signs of inflation pressure.

Perrault says the only scenario that prevents hikes would be significantly weaker inflation or significantly weaker growth.

On the flip side, he says there is a possibility that growth surprises in 2026 if the transformation the Prime Minister and premiers are trying to engineer works sooner than expected, private investment turns around, consumers are healthier and car and housing markets continue to pick up.

“Its not completely impossible that we don’t have an interest rate increase,” said Perrault.

National Bank of Canada: Changed forecast after strong economic data

National Bank of Canada also expects the key interest rate to rise by 50 basis points late next year.

The bank had initially foresaw rate hikes in 2027.

“But recent resilience in economic data meant that we had pulled forward that tightening in our recent official forecast,” Ethan Currie, strategist with National Bank of Canada told BNN Bloomberg.

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Currie expects Canadian bond yields to increase in anticipation of future monetary policy tightening and for now, the Bank of Canada will likely wait and keep interest rates low, probably until the middle of next year

“However, if positive economic momentum continues, that should see shorter end rates drift higher, with modest curve flattening our base case in that environment,” said Currie.

He says the biggest risks to the bank’s forecast would be shocks to the labour market or CUSMA.

“Those are really the two big wild cards, and supposedly pretty interconnected wild cards,” said Currie.

Who expects a hold?

CIBC: The bank “ought to be lowering rates further”

CIBC’s view is that the Bank of Canada won’t move on interest rates in either direction, but “they ought to be lowering interest rates further,” the bank’s chief economist Avery Shenfeld, told BNN Bloomberg.

Shenfeld said he sees a window where the central bank could cut more aggressively without generating a lot of inflation.

“The economy is still quite soft, which generates some downward pressure on inflation,” said Shenfeld.

“Import prices from overseas markets are also likely to be fairly subdued, and all of that leaves a cushion against inflation and room to help generate growth with still lower interest rates.”

He says the bank seems fairly cautious and is leaving it to fiscal stimulus to eventually get the economy moving at a better pace.

“The bank is a little too nervous about inflation and not nervous enough about growth,” said Shenfeld.

He said if there is going to be a move, it will be a rate cut, likely because growth turns out to be disappointing or “the inflation waters look calm enough” for the Bank of Canada to change its mind.

He said it will take some time to see the benefits of the fiscal policy measures that pertain to large capital projects.

RBC: There’s obviously risks in both directions

Jason Daw, head of North American FX strategy at RBC Capital Markets, also has a hold as his base case, but sees more risk of hikes than cuts.

“What we learned from the bank at the last meeting was they have kind of a clear conditional pause language, which suggest that the policy rate will probably be kept at the low end of their neutral range for the foreseeable future,” he said.

“So our base case is that they are on hold in 2026 now there’s obviously risks in both directions.”

Daw said slower population growth and lower immigration mean Canada’s trend growth rate is weaker than it used to be, so even one to one-and-a-half per cent GDP growth “is actually going to be a good growth number for Canada going forward.”

“But there is a greater risk that they hike rates instead of cutting,” Daw said.

For further cuts, he said growth would likely need to drop close to zero over the next few quarters, or Canada would need to be pulled into a U.S. slowdown or recession, which he still sees as a “low probability” tail risk.

TD Bank: Canada is in a period of slow growth

TD Bank expects the Bank of Canada to leave rates unchanged throughout 2026.

The Bank has already reduced rates enough over the last two years to rein inflation back down," Leslie Preston, senior economist for TD Bank told BNN Bloomberg.

Preston said Canada is in a period of slow growth as the economy adjusts to the new trade reality with the U.S. She said slower growth is going to lean against inflation while there are still some cost pressures pushing inflation up from trade changes and supply chain disruptions.

“So we think those two forces are going to balance out over the next year and keep inflation pretty close to the Bank of Canada’s two per cent target, so that they can just sit tight and leave rates where they are,” said Preston.

Preston said a recession or the economy being hit harder than expected by the trade war would likely push the Bank to cut rates, while stronger-than-expected growth and better news on U.S. trade that leads to rising inflation pressures could eventually force a hike.

“I think one of the biggest downside risks to the forecast is...when it comes time for CUSMA to be reviewed, the president rips up CUSMA or decides he doesn’t want a trade deal with Canada anymore,” said Preston.