The Bank of Canada’s December announcement landed exactly as predicted. Everyone, from markets to advisors to economists, was prepared for another rate hold, and that is what we got. But the calm headline hides a more interesting shift underneath. The cutting cycle appears to be over, the road back to 2 percent inflation looks less smooth than hoped, and the next move might actually be up, not down.
RBC Economist Claire Fan puts it clearly1. Today’s rate hold keeps the overnight rate at "2.25%, the bottom of the neutral range and where we expect it will remain through the end of 2026." For advisors still fielding client questions about more relief, this is an important signal. The BoC believes it has already done enough easing.
The bigger headline is simple. Inflation risks are not tilting in the direction many people expected.
A Better Economy, but Not a Different One
Fan points to the run of stronger data heading into the decision. Updated GDP figures back to 2022 showed healthier momentum, and the labour market delivered one surprise after another. The unemployment rate alone dropped "from 7.1% in September to 6.5% in November."
It would be easy to assume this puts the BoC closer to tightening again. Fan says that is not how they see it.
She explains that the stronger data does not change their overall view. "As much as recent data has been encouraging, we see it as reaffirming our cautiously optimistic base case rather than a fundamental shift in the Canadian economic outlook."
So the main story remains the same. The recovery is gradual, not dramatic, supported by the 275 basis points of rate cuts delivered since June 2024.
This mirrors Governor Tiff Macklem’s tone at the press conference, where he called for "modest growth and slow absorption of economic slack" and repeated the Bank’s holding bias.
Fan also notes that Canada has consistently landed toward the optimistic end of the Bank’s projections. Two stabilizers have played a major role:
- CUSMA exemptions that protected most exports to the United States from tariff shocks
- Household spending that keeps holding up, even after two demanding years of rate hikes
Why Rate Cuts Are Probably Finished
The economy is no longer weakening, and unemployment is improving. That makes it harder to justify more cuts.
Fan puts the conclusion plainly. "With that, we think the BoC is done with rate cuts, and that the next change in interest rates is more likely to be a hike."
Her baseline is that a hike will not arrive until 2027. But she adds an important caution for advisors. "Risks are tilted toward an earlier move."
Clients hoping for more cuts may be looking the wrong way. The more realistic risk is renewed tightening.
The Delicate Math Behind 2 Percent Inflation
The BoC’s confidence in holding inflation near target comes down to a single balancing act. The Bank believes the remaining slack in the economy will counter the rising costs caused by trade shifts in North America.
Fan summarizes this assumption clearly. "Ongoing economic slack to roughly offset cost pressures associated with the reconfiguration of trade," keeping inflation close to "around the 2% target."
She agrees with the logic, but she also highlights two forces that could easily disrupt this balance.
Risk 1: Consumers Still Are Not Slowing Down
Even after the rate hikes, consumer spending has held up. Fan points out that the economy still has room to spare, since "by most measures, the economy still has excess supply", but that cushion is narrowing. The output gap is now "smaller (albeit still negative) ... than previously expected."
At the same time, spending remains steady. Fan cautions:
"Consumer purchases have also broadly held onto resilience this year and could remain a source of strength if not upside risks to our growth and inflation forecast in 2026, following improvements in labour market conditions."
In other words, stronger spending weakens disinflation at exactly the moment when the BoC needs slack to do the heavy lifting.
Risk 2: The Quiet but Persistent Costs of Trade Reconfiguration
Even though Canadian producers are not directly paying tariffs, the costs still show up. Fan notes:
"Canadian producers are not directly paying tariffs, but still face cost increases for managing trade complications, investing in alternative sources or partners, and absorbing higher prices from U.S. counterparts through integrated supply chains."
These pressures do not disappear quickly. They feed into prices over time.
Putting the two risk factors together, Fan’s central point comes through clearly. "On both fronts, we see risks mostly tilted towards more inflationary pressures, not less."
What Happens if These Risks Build?
If consumer momentum stays strong, or if trade related costs escalate, the BoC may be pushed into action sooner than projected. Fan writes:
"If either of those risks were to materialize more tangibly, risks of BoC rate hikes as early as H2 2026 rise."
For advisors, this is the key takeaway. Rate cuts defined 2024 and 2025. 2026 could look very different.
What Advisors Should Be Thinking About Now
- Reset client expectations. We are likely staying at 2.25 percent through 2026.
- Prepare clients for the possibility of hikes. Fan believes the next move is more likely to be upward.
- Watch consumption data closely. It is becoming the decisive factor in the inflation story.
- Do not ignore trade driven inflation. These costs are structural, not temporary.
- Position portfolios for higher for longer. Steady cash flows, quality balance sheets, and thoughtful duration exposure still matter.
The Bigger Picture, A Quiet Turning Point
The Bank of Canada may sound calm, but the macro backdrop is shifting. Slack is shrinking. Spending is steady. Trade is getting more complicated and more expensive.
The easing phase is behind us. Inflation risks are bending upward. And as Fan notes, the next meaningful policy move could arrive sooner than many expect.
Footnotes:
1 Claire Fan. RBC Economics "BoC done with rate cuts, expects 2% inflation to persist." RBC Economics, 10 Dec. 2025.
