The Financial institution of Canada says it’s staying “cautious” heading into 2026 as uncertainty stays excessive with the worldwide commerce conflict, tariffs and a commerce cope with the U.S. set for assessment subsequent month.
On Tuesday, the Financial institution of Canada launched its written abstract of deliberations from the final fee announcement.
This comes after the Financial institution opted to depart borrowing charges alone earlier in December, and after reducing its benchmark fee by a complete of 1 per cent over the course of 4 conferences in 2025.
Though there have been a number of areas of warning, the Financial institution mentioned Canada’s financial system was doing considerably higher than anticipated total.
“Members agreed the Canadian economy was showing signs of resilience after a year of trade upheaval, but uncertainty remained high,” mentioned the Financial institution of Canada.
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“They would remain cautious in interpreting incoming data given recent volatility and would be prepared to react if their outlook changed materially.”
9:29Canada–U.S. commerce tensions: The place issues stand and what comes subsequent?
The commerce conflict started in March, when U.S. President Donald Trump imposed tariffs on items and companies from nearly all international locations, together with Canada.
Though the phrases outlined within the Canada United-States Mexico Settlement, or CUSMA, meant nearly all of Canada’s exports can be freed from tariffs, the duties imposed on vital sectors like metal, aluminum, lumber, automotive and others meant GDP was being impacted.
Commerce coverage stays a vital piece of Canada’s financial system heading into 2026, as the present CUSMA is about for assessment.
If a renewed commerce deal continues to see most, if not all items stay freed from tariffs, then the Financial institution sees the financial system rising, albeit slowly.
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Nevertheless, if CUSMA expires with no new deal in place or extra tariffs are imposed on Canadian items, then the financial system may tilt in the other way.
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“Members agreed that the upcoming review of the Canada-United States-Mexico Agreement (CUSMA) was a significant risk. The uncertainty leading up to and during negotiations would likely weigh on business investment,” mentioned the Financial institution of Canada.
“A worst-case scenario involving the dissolution of CUSMA and higher tariffs would be very damaging to the Canadian economy.”
1:55Canada’s GDP blew previous expectations – however financial indicators nonetheless flashing indicators of weak spot
Gross home product, or GDP, measures the overall worth of all items and companies produced in an financial system like Canada’s in a given interval.
Within the three months spanning from March by way of Might, Canada’s GDP fell by a complete of 1.8 per cent. Two back-to-back quarters, or a six-month interval of unfavourable GDP meets the technical definition of a recession, however the third quarter noticed a rebound.
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“After declining by 1.8 per cent in the second quarter, GDP grew by 2.6 per cent in the third quarter, which was stronger than expected,” mentioned the Financial institution of Canada.
The Financial institution additionally signalled that the present fourth quarter, October by way of December, will possible see one other interval of weaker financial exercise, main right into a barely optimistic first quarter of 2026.
“They (governing members) expected fourth-quarter GDP to be soft, with increases in consumption, housing activity and government spending offsetting weakness in business investment and net exports,” mentioned the Financial institution of Canada.
“GDP would expand at a moderate pace in 2026 and inflation would remain close to the two per cent target.”
The labour market was an space the place the Financial institution confirmed some optimism, though with some caveats.
The November Labour Power Survey from Statistics Canada marked the third straight month of employment progress, and the unemployment fee fell from 7.1 to six.5 per cent. Nevertheless, a lot of the new jobs had been part-time and job vacancies stay low, as companies weren’t as keen to rent new employees.
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“Members were encouraged by the job gains reported in the Labour Force Survey for November. While this was a sign the labour market was improving, a broader set of indicators showed a mixed picture,” mentioned the Financial institution of Canada.
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“Governing Council members noted that much of the hiring over the past three months was in part-time jobs. They also noted that vacancies were low and that surveys of businesses indicated that hiring intentions were subdued.”
2:26Food costs climb as households brace for the vacations
Inflation can also be a key space of focus for the Financial institution of Canada, and though the excessive price of residing in Canada continues to be a significant challenge for thus many Canadians, the Financial institution says costs have remained considerably steady in 2025.
The abstract launched Tuesday outlines how governing members on the Financial institution anticipate the Shopper Worth Index, or CPI, to “rise slightly” over the subsequent few months, however will nonetheless keep near the 2 per cent goal.
Because of this regardless that costs now could also be larger than many Canadians can afford, particularly for necessities like meals, the Financial institution of Canada doesn’t anticipate costs to rise far more than what has been seen in latest months.
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Gov. Tiff Macklem on the Financial institution of Canada acknowledged on the final fee announcement in December that though inflation has come down, “prices have not.”
A separate report from the Financial institution of Canada suggests the easiest way to unravel the affordability disaster is to not discover methods to decrease costs, however as an alternative to boost the earnings of Canadians to allow them to afford the present price of residing. To do that, the Financial institution provides that Canada wants to extend its financial productiveness.
The Financial institution additionally mentioned with the upcoming modifications to the CUSMA that fiscal and industrial coverage, like with the federal finances, “were appropriate tools to address this structural transition,” however that any optimistic outcomes from these insurance policies possible gained’t occur in a single day.
“The federal budget included measures aimed at increasing public and private investment, but members agreed it will take some time for the impact of these measures to be fully realized,” mentioned the Financial institution of Canada.
For debtors, or those that anticipate to borrow cash for issues like a mortgage or automotive mortgage in 2026, the Financial institution of Canada mentioned due to “the high level of uncertainty,” it wasn’t positive if the subsequent rate of interest transfer can be a lower or a hike.
“Members agreed that while the current policy rate was at about the right level in the current situation, it was difficult to predict when and in which direction the next change in the policy rate would be,” mentioned the Financial institution of Canada, including that if wanted, it’s “prepared to respond.”
