RBC Economics says Canadian GDP growth slowed in late 2025. It cut its Q4 forecast from 0.5% annualised growth to flat. Real GDP per person is still expected to rise slowly into 2026.
Manufacturing that depends on trade is still weak. However, RBC says the spillover to the rest of the economy has been limited. The labour market is stabilising, and the unemployment rate is trending lower.
Core inflation is still above target, but it is easing. RBC links these trends to expectations that the Bank of Canada will keep policy steady.
The Bank of Canada held the overnight rate at 2.25% in January for a second meeting. It said the policy rate “remains appropriate” and is at the bottom of the neutral range. RBC expects the rate to stay at 2.25% through 2026, pointing to a steadier labour market, more fiscal support, and easing inflation pressure.
RBC also cites the IEEPA ruling. It says the impact on Canada depends on whether tariffs exempt trade that complies with CUSMA. In the past, exemptions have protected most Canadian exports to the U.S. from IEEPA measures.
The article says it was produced using an AI tool and reviewed by an editor.
With the Bank of Canada holding at 2.25%, we see little reason to expect near-term rate surprises. Growth looks modest, and the labour market is steady. The Bank appears comfortable waiting. That should keep volatility low in short-term rate products like BAX futures in the weeks ahead.
Recent data supports this view. January inflation was 2.5%. That is still above target, but it continues to cool from last year’s highs. The January labour report showed unemployment at 5.4%. That stability does not force the Bank to act.
This calm follows a large easing cycle that ended in 2025, after rates were cut from the highs reached in 2023. Flat GDP in Q4 2025 was a key reason the Bank stopped cutting. Markets now expect an extended pause, and pricing in derivatives implies the 2.25% rate will hold through the year.
For options traders, this backdrop may favour low-volatility strategies, such as selling straddles or strangles on rate or FX products. Implied volatility in CAD options has already dropped since last year. That fits the market’s view that the BoC will not be a major source of price moves. The main risk to these trades would be a surprise rebound in economic data.
With domestic rates stable, the Canadian dollar will likely be driven more by outside forces. Key inputs include oil prices (especially Western Canadian Select) and shifts in global risk sentiment. U.S. growth also matters. Even with CUSMA exemptions limiting major trade shocks, Canada’s trade-exposed manufacturing remains sensitive to U.S. demand.
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