A new survey conducted by the Bank of Canada indicates that financial market participants are anticipating the central bank's next interest rate move will be an increase, though not until the third quarter of 2027.
Market Expectations for Interest Rates
The quarterly survey, which polled 30 participants including dealers, banks, asset managers, and researchers between September 9 and October 1, found a consensus that the Bank of Canada will maintain its current policy rate of 2.25 per cent before raising it to 2.50 per cent in late 2027. This marks a shift from the previous survey in August, where respondents expected rates to be cut to 2.25 per cent and held until 2026.
Despite this projected hike, a significant majority of those surveyed, 63.3 per cent, indicated that the risks were skewed toward a lower path for interest rates, suggesting underlying economic concerns.
Recession Risks and Economic Outlook
The survey also assessed the probability of an economic downturn. The median expectation among respondents placed the odds of a recession in Canada over the next six months at 35 per cent. This figure is unchanged from the second-quarter survey but represents a substantial increase from the 20 per cent chance cited in the third quarter of 2024.
The outlook shows some deterioration, with the 25th percentile of responses placing recession odds at 20 per cent, up from 10 per cent a year ago. A recession is formally defined as two consecutive quarters of contracting economic growth.
Broader Economic Context and Forecasts
This survey was conducted before the recent breakdown in trade talks between the U.S. and Canada, which occurred after former U.S. President Donald Trump took offense to an anti-tariff advertisement run by the Ontario government.
Regarding other economic indicators, the median forecast from survey participants expects GDP growth of 0.6 per cent year over year in 2025, rising to 1.7 per cent by the end of 2026.
Respondents identified several key risks to their forecasts. The potential upsides include an easing of trade tensions, larger-than-expected fiscal stimulus from the government, and further rate cuts from the Bank of Canada. The primary downside risks are an escalation in trade tensions, weaker consumer spending, and a further softening of the housing market.
This financial market perspective comes after the Bank of Canada cut rates to 2.25 per cent on October 29, with Governor Tiff Macklem stating that rates were at an appropriate level to support the economy without spurring inflation. He also noted that monetary policy has limited power to address structural economic changes caused by the trade war with the United States.
