The Canadian economy is navigating a complex intersection of persistent labor market slack, a dormant housing sector, an uncertain trade relationship with the United States, and an inflation trajectory that, while elevated, is not yet broad enough to compel the Bank of Canada to act. On a recent episode of BMO Global Asset Management's Open Outcry podcast, Bipan Rai, Head of ETF and Alternatives Strategy at BMO GAM, sat down with Andrew Kelvin, Head of Canadian and Global Rates Strategy at TD Securities, to dissect where Canadian rates are heading — and why market pricing for two Bank of Canada hikes by end-2026 is, in Kelvin's view, simply wrong.
The Rate Hike Case Doesn't Hold
The market's hawkish lean on the Bank of Canada has been one of the defining features of domestic fixed income this year. Kelvin is unconvinced. "I don't agree," he says flatly. "I think it overlooks a few factors around the Canadian economy that will keep the Bank of Canada on hold through 2026."
At the center of Kelvin's argument is the degree of economic slack still present in the system. With unemployment sitting at 6.9% — a figure that emerged from an April Labor Force Survey showing the economy shed 17,000 jobs, with full-time employment falling nearly 47,000 — Kelvin sees no urgency. "We're talking about an unemployment rate that's probably more than 1 percentage point above what we would think of as a natural rate of unemployment," he notes. "Even if we believe that high oil prices will have a positive impact on Canadian GDP growth, which we do, it's still a lot of slack to chew through."
Compounding this, shelter comprises approximately 30% of Canada's CPI basket. With the housing market in what Kelvin describes as "the doldrums," that component will act as a structural drag on headline inflation — an anchor the Bank of Canada can lean on. "The housing market is in the doldrums and that will help keep inflation pretty well anchored," he says.
A Patient Central Bank — by Design
The question of whether Governor Macklem's comments about potential consecutive hikes represented a genuine policy signal or rhetorical hedging generates pointed discussion. Kelvin read the Bank's communication carefully and took away a specific message: "They don't really know what the next move will be. They'll move as appropriate, when appropriate — and what is appropriate, the when is not right now."
The Bank's unusual willingness to emphasize downside risks, even as some data points suggest modest resilience, reflects, in Kelvin's view, a form of post-pandemic institutional caution. "The bank of Canada talks about the trade dispute with the United States a lot, probably more than I would if I were in their position," he observes. The subtext: credibility scarred by the 2022 inflation episode is shaping how the Bank communicates — and how markets react. "If you were to see a second shock like that within the space of one governor's mandate, you could be forgiven for questioning the stability of inflation expectations."
Kelvin's base case is unambiguous: "I think the Bank of Canada will stand on hold for all of 2026." He adds that the most surprising outcome, in either direction, would be a single 25-basis-point move. "The scenario that would surprise me the most is if they moved in either direction by just 25 basis points. They almost always move in bursts of two or three."
Inflation and Growth: A Contained Picture
TD Securities projects headline CPI will reach approximately 3% in the second quarter — even accounting for the suspension of the fuel excise tax. Services inflation has proven more resilient than Kelvin anticipated, tied to wage growth that has held up despite elevated unemployment. "Services inflation has been a bit more resilient than I would have anticipated given the level of unemployment, because wage inflation frankly has been quite a bit more resilient than I would have anticipated given the size of the unemployed population."
On the growth side, Kelvin's team forecasts annualized real GDP expansion in the range of 1.6% to 1.9% — numbers that sound modest but carry more substance in a context of falling population growth. "We are in a negative population growth environment. So growing the economy by 1.5% to 2% in real terms on an annualized basis is actually a pretty decent result." TD Securities assumes a potential growth rate of roughly 1.2%, consistent with the Bank of Canada's own assumptions. If actual growth exceeds that threshold, the output gap narrows — and the conversation about rate normalization in 2027 becomes more credible.
USMCA, Tariffs, and Trade Architecture
No analysis of Canada's macro outlook is complete without addressing the USMCA renegotiation. Kelvin approaches it with analytical humility. "These aren't economically motivated decisions or economically rational decisions that were taken to start this trade war. These are politically motivated decisions." Projecting outcomes through a purely economic lens, he argues, yields a false precision.
That said, Kelvin offers a grounded read on two key variables. First, energy: given high oil prices and cost-of-living pressures in both countries — but especially the United States — disrupting the cross-border flow of Canadian energy is, in his view, a non-starter. "I would be very surprised to see anything that would impair the flow of energy from Canada to the United States." Second, the persistence of USMCA exemptions over more than a year of trade tensions signals that someone with policy authority sees value in preserving the underlying agreement. "I do expect that those exemptions will persist. And for that reason we will see the trading relationship between Canada and the United States quite similar in the future to where it is today."
On the question of growing monetary policy divergence between the Bank of Canada and the Federal Reserve, Kelvin sees the structural case as durable. Canada's real non-energy exports have been flat for roughly 25 years, even as both economies have grown substantially. The direct manufacturing linkage is shrinking as a share of total activity — which means divergent economic outcomes, and by extension divergent monetary policy paths, are increasingly possible. "The US has significantly outperformed Canada. If you can have that kind of economic divergence in growth, surely you can in policy as well."
The Housing Market: Demographic Gravity
Kelvin's read on Canadian housing is straightforward and unsparing. "I have a pretty simple view on housing, which is that it's demographically driven." The surge in prices over recent years was a supply-demand imbalance amplified by a period of exceptional population growth. That dynamic has reversed. In a flat-to-negative population growth environment, "it's really hard for me to tell a story where house prices keep growing at a rate that is well above inflation."
Short of a sharp improvement in the labor market, a resumption of population growth, or emergency-level monetary stimulus — none of which Kelvin views as likely in the next two to three quarters — he anticipates "pretty dull price action in the housing market."
Yield Curve Forecast: Lower, Flatter
TD Securities forecasts the 10-year Government of Canada yield ending the year at approximately 330 basis points, down from roughly 359 at the time of recording. The 2-year is projected to drift 20 to 30 basis points lower in the near term before settling around 290 by year-end, with Bank of Canada rate hikes embedded in early 2027 providing a floor. Kelvin's curve call is modest: "Some mild flattening contingent on lower US yields in the mid and long part of the curve — mild flattening and potentially just almost a level shift."
He is comfortable with current valuations. "I don't think these are outrageously cheap levels for Canadian bonds, but nor are they rich. We are at levels where I think personally I would be comfortable with these valuations."
3 Key Takeaways for Advisors and Investors
1. The Bank of Canada is not hiking in 2026 — and the market is mispricing this.
With unemployment above 6.9%, a housing market anchored by demographic deceleration, and core inflation contained in the low twos, the conditions for consecutive Bank of Canada rate hikes simply do not exist. Advisors should be skeptical of fixed income positioning that relies on that scenario materializing.
2. Canadian bonds offer fair value — and a modest duration tilt makes sense.
TD Securities sees yields broadly lower across the curve by year-end, with a mild flattening bias. For fixed income allocations, the risk/reward of holding duration at current levels is reasonable — not a high-conviction trade, but not a penalty position either.
3. Canada-US trade risk is material but likely contained, with energy as the stabilizer.
The USMCA renegotiation introduces real uncertainty, but the political and economic logic around cross-border energy flows provides a structural floor under the trade relationship. Advisors should monitor inflation breadth and longer-term inflation expectations as the early warning indicators the Bank of Canada itself is watching most closely.
Footnote: 1 "The Open Outcry Podcast: All Things Canada and CAD Rates - May 12, 2026." BMO ETF Dashboard, 14 May. 2026.
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