Canada’s economy shrinks, but BoC cuts still likely off the table

The Canadian economy contracted by more than expected in the fourth quarter as GDP slipped by 0.6%, but economists still expect the Bank of Canada to sit on the sidelines in the months ahead and keep interest rates on hold.

Statistics Canada data on Friday showed the fourth-quarter figures took overall growth for 2025 to 1.7%. That marked the slowest pace of yearly growth since the first year of the COVID-19 pandemic, as companies pulled back on inventories to offset higher spending by consumers, businesses and governments.

While signs of a sluggish economy might normally point to potential easing down the line by the Bank of Canada, experts don’t see much chance the central bank will be cutting rates anytime soon.

Nathan Janzen, assistant chief economist at Royal Bank of Canada (RBC), doesn’t see much reason for decisionmakers to move rates lower despite the unexpected contraction.

“Most Canadian exports have remained duty free under a CUSMA [Canada-US-Mexico Agreement] exemption, the lagged impact of earlier Bank of Canada interest rate cuts has helped to stabilize consumer spending, and governments have stepped in to support the economy with added spending,” he wrote.

“The BoC still has flexibility to respond to any unexpected weakening in economic activity with lower interest rates, but our base-case assumption remains that further reductions to the overnight rate will not be needed this year.”

Bank of Montreal (BMO) chief economist Doug Porter sees a slim chance of rate cuts before the end of the year, but indicated in a note to clients that they shouldn’t count on a reduction in the central bank’s coming decision.

“We look for GDP growth this year to come in just a bit better than 15, although perhaps less choppy than 2025’s see-saw pattern,” he said. “Such mild growth does keep the door slightly ajar to the possibility of BoC rate cuts, but we’re not there quite yet.”

Servus chief economist Charles St-Arnaud highlighted that uncertainty remains high even if the economy may continue improving modestly in the quarter ahead – but he doesn’t see cuts on the way.

“The current situation is unlikely to materially change the BoC’s views on the economy,” he wrote, “and we continue to expect the BoC to keep its policy rate unchanged for an extended period.”

Source CMP
By Fergal McAlinden