Renowned analysts at Capital Economics are signaling a significant shift in Canada’s monetary outlook, anticipating a far more aggressive policy response than markets currently predict. In contrast to the prevailing consensus—where top-tier financial institutions project the Bank of Canada’s key interest rate to stabilize at or above 2.25%—Capital Economics envisions a pronounced easing, with the benchmark rate potentially descending to a refined 1.75% within the coming year. This bold forecast emerges in the wake of Canada’s narrow sidestep of a technical recession and is underscored by persistent, broad-based economic fragility.

The advisory’s projections are rooted in a tapestry of economic indicators. They foresee GDP growth moderating to a tepid 1% for the year, as well as a climb in unemployment, expected to crest at 7.3% by early 2026. The interplay of weakening domestic momentum, shocks originating from U.S. tariff policy, and a slowdown in immigration creates a compelling case for robust monetary easing. Notably, the removal of most retaliatory U.S. tariffs, alongside softening in the labour market, is poised to temper inflationary pressures, nurturing an environment where core inflation could gravitate toward the Bank’s ideal 2% target. This dynamic would grant the central bank greater latitude for a stimulative policy posture.

However, the trajectory and cadence of future rate reductions remain entwined with imminent government decisions. The contours of the upcoming federal budget and the possibility of workforce reductions in the public sector could materially influence the Bank’s flexibility and resolve. Stakeholders and market participants will be closely watching these developments, as they have the potential to reshape both expectations and policy. For a comprehensive look into the forces shaping Canada’s economic landscape, consult authoritative resources such as the Bank of Canada and leading industry analyses.

In summary, while recent data illustrates that Canada has sidestepped an outright recession, a confluence of subdued growth, restrictive external factors, and waning demographic momentum creates conditions ripe for deeper rate cuts than the market currently prices. Capital Economics’ forecast of a 1.75% policy rate, should it materialize, will mark a dramatic pivot towards accommodation and shape Canada’s financial narrative well into the next year.