While the economic outlook is relatively weak, the Bank of Canada is likely done cutting interest rates — and its next move is expected to be a rate hike in the second half of 2026, Scotiabank economists are forecasting.
In a report Wednesday, the bank’s economists said they expect weak growth in both Canada and the U.S. next year.
“In Canada, the damage from trade policies and lower immigration is weakening potential growth, acting as a limit on growth in the near-term,” they wrote.
That said, the report called for that tepid growth to pick up a bit next year, climbing from 1.2% this year to 1.4% next year.
“That modest acceleration comes from what we believe to be more effective policy support in Canada relative to the U.S.,” it noted — including government efforts to boost domestic investment, while also curbing population growth.
Though the investment measures set out in the recent federal budget “do not appear to be game changers relative to our expectations,” the economists said it’s clear that “governments (both provincial and federal) are moving aggressively to identify transformational investment projects.”
At the same time, they expect “Buy Canada” policies to temper import growth alongside rising investment. “This provides a bit less drag from imports onto GDP relative to our pre-budget view,” they wrote.
“Despite this relatively tepid outlook, the net impact of these revisions is to generate a very welcome increase in GDP and consumption per capita and reverse some of the erosion in standards of living observed in recent quarters,” the report said.
At the same time, persistent inflation worries will likely keep the Bank of Canada from providing any additional monetary stimulus, the economists suggested.
“Weak productivity, strong wage growth, rising input costs and the potential for rising U.S. import prices reflecting the impact of tariffs on U.S. goods all point to upside risks to inflation despite growing excess supply,” the report said.
Against that backdrop, the economists said they see the most recent cuts from the Bank of Canada as “insurance against weaker outcomes given the uncertainties being faced,” but that the need for this insurance will dissipate in the second half of 2026.
As a result, they expect the central bank to unwind its latest cuts, hiking rates by 50 basis points in the second half next year.
“It may well be that an earlier reversal of those cuts is required if the economy responds more forcefully to the government’s transformation agenda than we have currently imbedded into our forecast,” the report noted.
The report also cautioned, “the Canadian outlook will remain under a cloud of uncertainty until the tariff situation is finally settled.”
In contrast, the U.S. Federal Reserve Board is expected to cut rates by another 100 basis points through the first half of next year, as U.S. growth slows and the labour market slumps, the report noted.
While U.S. inflation is expected to remain elevated, the Scotia economists said they “expect that the Federal Reserve will largely look through these price pressures, arguing that they are more likely to be one-off shocks related to tariffs rather than indicative of broader price pressures. There is also clearly immense political pressure on the Federal Reserve to be more aggressive in pursuing rate cuts.”