The Bank of Canada held its key rate at 2.25% in December 2025, after four consecutive cuts brought it down from the 5% peak. But here’s where it gets interesting: the big six banks can’t agree on what happens next. Two expect rate hikes in 2026, one expects further cuts, and three expect Governor Tiff Macklem to hold steady. After a year of aggressive easing, the path ahead is anything but certain. Here’s what you actually need to know.
Disclosure: Some links on this page are affiliate links. If you make a purchase through them, Britwealth may earn a commission at no extra cost to you. We only include products and services that are relevant to the topic.
This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
That spread — from 1.75% to 2.75% — tells you everything about the uncertainty right now. The BNN Bloomberg survey of six major economists found two expecting rate hikes, one expecting cuts, and three expecting a hold through 2026. BMO’s Earl Davis thinks the Bank will cut below the neutral rate to 1.75%. Scotiabank’s Jean-François Perrault sees inflation risks pushing rates up 50 basis points in the second half of the year. National Bank of Canada moved its forecast for hikes forward from 2027 to late 2026 after stronger economic data came in. Three different outcomes, each backed by credible reasoning.
If you’re carrying a mortgage, managing a portfolio, or just watching your cost of living, the direction of rates over the next 12 months changes the math on almost everything. The Farm Credit Canada analysis notes that Canada’s GDP is projected to expand about 1.7% in 2025, but consumption spending fell in Q3 for the first time since 2021, and business investment has been declining. That’s the backdrop against which the Bank of Canada makes its next move.
What I’d say about the neutral rate is this: it’s a moving target, not a fixed number. Weak productivity, a depreciating Canadian dollar, and trade tensions with the US all shift where neutral actually sits. The Bank of Canada indicated after its October 2025 cut that the policy rate was “at about the right level”, which suggests they think they’re near neutral already. But markets disagree — and that disagreement is the whole story.
What the Rate Split Means for Homeowners and Investors
When economists disagree this openly, it usually means the economy is sending mixed signals. And it is. On one hand, inflation has cooled enough to allow four rate cuts from 5% to 2.25%. On the other, Statistics Canada’s advance estimate for October GDP showed a sharp decline, and non-energy goods exports have dropped sharply since April 2025 as US tariffs hit key industries like automotive, steel, aluminum, and forestry. Tariffs as high as 50% on some goods are a heavy weight on an economy that’s already struggling.
For homeowners, the stakes are straightforward. A cut to 1.75% would lower variable mortgage rates further and could push fixed rates down too. A hike to 2.75% would reverse some of the relief that variable-rate borrowers have seen over the past year. And if you locked in a fixed rate during the peak, you’re watching the math on renewal change every month. The strategies for investing in Canadian real estate for passive income shift noticeably when the rate outlook is this uncertain.
For investors, the split matters in a different way. Lower rates typically boost equity valuations and make bonds less attractive. But if rates rise again, that trade reverses. The banks that expect hikes — Scotiabank and National Bank — are betting that inflation dynamics like wage growth and the weak Canadian dollar will force the Bank’s hand. National Bank’s Ethan Currie told BNN Bloomberg that stronger economic data moved their forecast for hikes forward from 2027 to late 2026. That’s a direct bet that the economy is healthier than the gloomier data suggests.
Where the Standard Thinking Goes Wrong
The biggest mistake people make right now is assuming that rates will continue in a straight line. After four cuts, it’s natural to expect more. But the Bank of Canada has already signalled it thinks rates are about right. The First National analysis of post-budget rate futures put the chance of a 25-basis-point cut on December 10 at just 19%, down from 23% at the start of that week. The market itself was pricing in a hold.
Another common error is treating all rate cuts the same. A cut from 2.25% to 2.00% has a different economic meaning than a cut from 5% to 4.75%. At 5%, the Bank was actively restricting the economy. At 2.25%, it’s much closer to neutral. Further cuts from here would signal that the Bank thinks the economy needs active stimulation, not just relief from high rates. That’s a more concerning signal, not a reassuring one.
There’s also the assumption that lower rates automatically help everyone. They don’t. If rates drop because the economy is genuinely weak, that weakness hurts employment, income, and investment returns. The boost from lower borrowing costs gets offset by the drag from a slowing economy. The GCC analysis notes that debt servicing burdens are already constraining consumer spending, and that’s before any further economic deterioration.
→ Scroll right to see all columns
| Bank | 2026 Rate Forecast | Direction |
|---|---|---|
| BMO | 1.75% – 2.00% | Cut below neutral |
| RBC | 2.25% | Hold steady |
| TD | ~2.25% | Hold (implied) |
| CIBC | ~2.25% | Hold (implied) |
| National Bank | 2.50% | Hike in late 2026 |
| Scotiabank | 2.75% | Hike in H2 2026 |
What I’d watch most closely is the range of alternative Canadian investments that tend to respond differently to rate changes. Bonds, REITs, and dividend stocks all react to the same rate signal in different ways. If you’re betting on a cut, you’d position one way. If you’re betting on a hike, you’d position another. The smartest move is to avoid a single bet altogether.
Reading the Signals and Positioning for Either Outcome
Watch the Inflation and Wage Data
BMO’s case for cuts rests on weak Canadian productivity relative to the US. Scotiabank’s case for hikes rests on wage growth and the falling Canadian dollar. The data that settles this debate will come out month by month. If wage growth stays sticky and the dollar keeps falling, the hike camp gains credibility. If GDP continues to weaken and consumption stays flat, the cut camp wins. Following the FCC’s monthly tracking of trade and domestic demand gives you a real-time read on which side is winning.
Understand Your Mortgage Exposure
If you’re on a variable-rate mortgage, the difference between 1.75% and 2.75% is roughly $1,000 per year per $100,000 borrowed. That’s a real swing. The best approach is to consult a real estate lawyer to understand your renewal options and break penalties before making any moves. Fixed-rate locks might make sense if you think rates will rise, but you’ll pay a premium for that certainty. If you think rates will fall, staying variable or floating gives you the upside.
Look at the Bond Market, Not Just the Bank
The Bank of Canada sets the overnight rate, but mortgage rates are more directly tied to bond yields. The federal budget outlined plans to issue about $609 billion in total in 2025–26, with $298 billion in bonds in 2026–27. That supply matters. More bond issuance can push yields higher even if the Bank holds rates steady. The Canada Mortgage Bond annual issuance limit is also rising from $60 billion to $80 billion starting in 2026, with the extra $20 billion going to multi-unit rental housing. That’s a deliberate attempt to lower funding costs for rental construction, and it’s worth watching how private investors absorb that supply.
Don’t Ignore the Currency Effect
BMO’s Earl Davis noted that a stronger Canadian dollar is preferred by the Bank as a natural economic balancer, and that rate hikes would strengthen the currency and deter international investors. If the dollar weakens further, that alone could push the Bank toward holding or even hiking, regardless of domestic economic conditions. The tariff situation with the US — including the CUSMA renegotiation and oil price changes — is a wildcard that affects both the currency and the trade balance.
Frequently Asked Questions About Canadian Interest Rates in 2026
Will rates definitely keep dropping in 2026? ▾
What does a split forecast mean for my mortgage? ▾
How low could rates realistically go? ▾
What could force rates to rise again? ▾
How do US tariffs affect the rate decision? ▾
Should I fix my mortgage rate now or wait? ▾
Rates Are at a Crossroads — Not a Destination
The Bank of Canada has brought rates down from emergency levels, but the next move is far from obvious. The split among the big banks reflects a genuine economic tension: the economy is weak enough to justify cuts, but inflation and currency pressures are strong enough to justify hikes. The resolution of that tension will play out over the next 12 months, and the data will shift week by week. What matters most is staying flexible, understanding your own exposure, and watching the signals that actually drive the decision — not assuming the trend will continue because it has so far.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Ethical Dilemmas in Finance: Navigating Grey Areas as a Trusted Advisor.
Sources and Further Reading
Smart Tips for Investing in Purpose-Built Rentals in Canada — A practical guide to a sector that benefits directly from lower rates and expanded CMB funding.
Top Tips for Choosing Income Protection Insurance in Canada — Protection that matters more when the rate outlook is uncertain and household budgets are under pressure.
BNN Bloomberg (2025). Big Six Banks Split on 2026 Rate Path. 🔗
Farm Credit Canada (2025). Canada’s Economy Deceleration in 2026. 🔗
Canadian Mortgage Trends (2025). Canada’s Big Banks Diverge on 2026 Rate Forecasts. 🔗
First National (2025). On the Radar: What is the Interest Rate Outlook After the Canadian Budget. 🔗
