Ottawa's budget watchdog projects that the Bank of Canada will maintain its key interest rate at 2.25% through 2026 before gradually increasing it to 2.75% by the end of 2027, according to a new economic outlook released Thursday.
PBO Economic Outlook Details
The Parliamentary Budget Officer's report indicates the central bank will hold fire this year as the economy operates below its productive capacity and inflation remains elevated due to higher energy prices. Once supply disruptions from the Iran war ease and inflation returns to the 2% target, the bank will raise rates to 2.5% by mid-2027 and 2.75% by year-end.
However, if energy prices stay high for an extended period, the Bank of Canada may adopt a tighter monetary policy stance to manage inflationary pressures. Bank Governor Tiff Macklem made similar comments before a parliamentary committee in April.
Economic Weakness and Trade Frictions
“The economic outlook has weakened somewhat compared to our September projection due to enduring trade frictions and higher uncertainty,” the PBO report stated. “We expect growth to remain subdued through 2026, before gradually recovering as net exports begin to rebound from depressed levels.”
Persistent uncertainty continues to weigh on business investment and household spending, while slower population growth reduces potential output in the short term.
Upcoming Bank of Canada Decision
The PBO report arrives ahead of the Bank of Canada's next interest rate announcement on June 10. Soaring oil prices and uncertainty surrounding U.S. tariffs were key concerns for the governing council in April. Economists widely expect the central bank to hold its key overnight rate at 2.25% for the fifth consecutive time.
“At this point, it’s too early to respond to the weakness in the economy with a rate cut, but the economy also doesn’t require any monetary tightening right now,” said Royce Mendes, head of macro strategy at Desjardins Group.
Divergent Views on Timing of Rate Hikes
Economists are split on when the Bank of Canada will begin hiking. CIBC forecasts the rate will stay at 2.25% through 2026 and most of 2027 before rising to 2.75% by September 2027. Desjardins predicts the first hike in the first quarter of 2027, also reaching 2.75% by year-end.
Mendes expects the economy to “return to full health” as Canada and the U.S. finalize a deal on the Canada-U.S.-Mexico Agreement and fiscal stimulus from Budget 2025 takes effect. He also forecasts modest population growth next year, supporting economic expansion.
