Bank of Canada expected to hold as debate shifts to timing of rate hikes

The Bank of Canada is expected to keep its policy rate unchanged at 2.25% on Wednesday, which would mark a sixth consecutive hold.

With a hold now largely priced in, the more consequential question is whether the Bank’s updated forecasts and accompanying language begin to lay the groundwork for rate hikes later this year.

That debate has sharpened as the economy shows signs of recovering from a weak start to 2026, even as inflation remains uncomfortably high. Headline inflation has climbed above 3%, driven largely by higher energy costs, while recent GDP and employment data suggest the economy may be emerging from its early-year soft patch.

BMO senior economist Benjamin Reitzes said the bar for a move in either direction remains high. The recent improvement in economic data gives the Bank little reason to cut, while continued slack in the economy should keep policymakers from rushing to raise rates.

“The economic data have turned up recently following a miserable run,” Reitzes wrote. However, he said the economy’s persistent output gap should continue to generate disinflationary pressure and limit the Bank’s willingness to tighten policy.

He said lower oil prices should ease some of the Bank’s immediate concerns, but policymakers will continue watching for signs that higher energy and transportation costs are spreading more broadly. With the 2021-to-2023 inflation surge still fresh, the key issue is whether the rise in headline inflation proves temporary or begins to influence wages, inflation expectations and the wider consumer price basket.

Updated forecasts could reveal a more hawkish tilt

The Monetary Policy Report, which sets out the Bank’s updated forecasts for growth and inflation, may offer a clearer signal than the rate announcement itself.

Scotiabank economist Derek Holt expects the Bank to mark down its first-quarter outlook after GDP contracted slightly rather than expanding as forecast. That weakness may be offset by a stronger rebound in the second quarter, which Holt estimates may have exceeded 2%, above the Bank’s April projection of 1.5%.

“The BoC may need to revise down its 2026 GDP growth forecast in marked-to-market fashion after Q1 GDP disappointed,” Holt wrote, adding that a stronger second quarter could provide a partial offset.

Scotiabank says inflation remains the tougher part of the outlook, with headline CPI reaching 3.2% in May—above the Bank’s projected 3% peak—and a weaker Canadian dollar, elevated input costs and firmer short-term core measures still pointing to upside risk despite lower oil prices.

Holt said the Bank may need to revise its 2026 inflation forecast upward, arguing that Canada appears to be moving out of its winter “inflation soft patch.”

Scotiabank sees those pressures eventually pushing the Bank to withdraw some stimulus, with two quarter-point hikes expected before year-end and a third in early 2027. That would take the policy rate to 2.75% by December and 3% shortly thereafter.

Big banks differ mainly on when hikes begin

The latest forecasts show a growing divide over how long the Bank can remain on hold—and how quickly rates may rise once tightening begins.

TD and BMO expect the policy rate to stay at 2.25% through the end of 2027. CIBC and National Bank see hikes beginning next year, while RBC projects a more gradual tightening cycle that takes the rate to 3.25% by the end of 2027.

Scotiabank remains the most aggressive forecaster, with hikes beginning in the fourth quarter of this year and the policy rate reaching 3% in early 2027.