The Bank of Canada is widely expected to keep its benchmark interest rate unchanged for the rest of this year and through 2026, according to a new forecast from UBS Global Research. The call comes even after Canada's economy expanded at a solid 3.3% annualized pace in the second quarter, a figure that might normally prompt talk of tighter policy.
UBS analysts argue that the lingering threat of US trade tariffs and broader trade uncertainty will keep the central bank on the sidelines. Instead of reacting to the recent growth spurt, policymakers are likely to prioritize stability while they assess how trade frictions could weigh on exports and business investment.
Why the Bank of Canada might hold steady
Central banks typically raise interest rates to cool an overheating economy or cut them to stimulate growth. The Bank of Canada's key rate influences the cost of borrowing for mortgages, car loans, and business credit across the country. When the bank holds rates steady, it signals that it sees the current level as appropriate for balancing inflation and growth.
Canada's second-quarter GDP growth of 3.3% annualized was stronger than many economists expected. That kind of momentum might normally push a central bank toward a more hawkish stance—meaning it could consider raising rates to prevent inflation from taking off. However, UBS believes the bigger risk is external: the ongoing US trade tensions, which have already disrupted supply chains and created uncertainty for Canadian exporters.
Trade disputes can hurt an economy by raising costs for businesses and reducing demand for exports. For a trade-dependent country like Canada, where the US is the largest trading partner, such tensions can be a significant drag. The Bank of Canada may be reluctant to tighten policy when the outlook is clouded by potential tariffs or other trade barriers.
What this means for investors
For everyday investors, the key takeaway is that borrowing costs are likely to stay higher for longer than some might have hoped. If you're carrying a variable-rate mortgage or a home equity line of credit, a prolonged hold means your payments won't drop anytime soon. On the flip side, savers could continue to earn decent returns on high-interest savings accounts and short-term bonds.
For stock market investors, a steady rate environment can be a mixed bag. Banks and other financial institutions often benefit from stable interest rates because they can manage their margins more predictably. However, sectors that are sensitive to borrowing costs, such as real estate and consumer discretionary, may face headwinds if rates remain elevated.
UBS's forecast also suggests that the Canadian dollar could remain under pressure if the Bank of Canada stays put while the US Federal Reserve eventually moves in a different direction. Currency movements can affect the returns on international investments and the cost of imported goods.
Looking ahead to 2027
UBS expects the Bank of Canada to begin easing—cutting rates—in 2027, once trade tensions have presumably resolved and the economy has adjusted. That timeline is longer than many market participants had anticipated. Earlier this year, some traders were pricing in rate cuts as soon as late 2025 or early 2026.
The delay reflects the central bank's cautious approach. With inflation still above the bank's 2% target in many sectors, and with the economy showing resilience, policymakers have room to wait. They can afford to keep rates restrictive until they see clearer evidence that inflation is sustainably moving lower.
Investors should watch for signals from the Bank of Canada's upcoming policy meetings and economic data releases. Any surprise in inflation or employment figures could shift the timeline. Also, keep an eye on developments in US trade policy, as that remains the biggest wildcard for the Canadian economy.
For those with a longer investment horizon, the prospect of rate cuts in 2027 could be an opportunity. Lower rates typically boost stock valuations, especially for growth companies and dividend-paying sectors. But trying to time the market based on central bank forecasts is risky. A diversified portfolio that matches your risk tolerance is usually a more reliable strategy.
In the meantime, the Bank of Canada's steady hand provides some predictability. That can be valuable for businesses planning investments and for households managing budgets. As always, staying informed and adjusting your financial plan gradually is better than making sudden moves based on short-term predictions.
