National Bank of Canada analysts say weaker Canadian economic data, lower inflation, and higher trade uncertainty have reduced the odds of Bank of Canada rate hikes in 2026. They now expect any tightening to be delayed until at least early 2027.
They say a path to 2026 rate hikes still exists, but it is now less likely. They add that if the Bank of Canada starts leaning toward rate cuts, they would not expect that shift before late this year.
They forecast that if monetary policy stays unchanged, Canadian government bond yields should remain broadly steady through 2026. They also say Canadian yields may still outperform global peers, including U.S. Treasuries, UK gilts, and Japanese government bonds.
The article notes it was produced with help from an artificial intelligence tool and reviewed by an editor.
The path to a 2026 Bank of Canada rate hike has narrowed sharply. Recent data supports this view. January’s inflation report came in cooler at 1.9%, and GDP growth stalled in the final quarter of 2025. This strengthens the case that the central bank will delay any tightening until at least early 2027.
If monetary policy stays on hold, we expect bond yields to move sideways for the rest of the year. Traders could position for a low-volatility market by selling options on BAX or CGB futures to collect premium. Another way to express the view that the market is overpricing hike risk is to receive fixed on short-term interest rate swaps.
From a risk-management standpoint, we still prefer Canadian rates over global peers such as U.S. Treasuries. The 10-year Canadian government bond yield has already outperformed its U.S. equivalent by 15 basis points since the start of the year. We expect this outperformance to continue as global trade uncertainty rises.
This change in rate expectations also makes the Canadian dollar less appealing. It has already slipped below 0.73 USD. More weakness is likely as long as the Bank of Canada stays on hold. Investors could express this view by shorting CAD futures or buying call options on the USD/CAD pair.
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