Bank of Canada MPS shows slow GDP growth, steady rates and inflation near target
Institutional investors and economists have a cautious but stable outlook for the Canadian economy and monetary policy.
The Bank of Canada’s Market Participants Survey for the fourth quarter of 2025, reflects views from roughly two dozen market participants and offers insight into expectations shaping financial markets and portfolio decisions.
Last week, BoC governor Tiff Macklem said that Canada is “at a crossroads” and faces lasting change from trade, technology, and demographics.
Respondents project year-over-year real GDP growth of 1.6% by the end of 2026, with a modest improvement to 1.9% by the end of 2027. Individual forecasts span a relatively narrow range, with the most pessimistic estimates closer to the mid-1% level and the most optimistic reaching just above 2%. Most participants assign the highest probability to growth falling between 1% and 2%, while still acknowledging meaningful downside risk, including the possibility of stagnation.
Trade dynamics dominate both sides of the risk ledger. Nearly all respondents identify easing trade tensions as the most significant upside risk to growth. Increased fiscal spending and stronger housing activity are also cited as potential supports. Conversely, rising trade frictions are seen as the primary downside threat, followed by tighter global financial conditions and weaker consumer demand.
The survey reinforces the view that the Canadian economy is operating below its potential. More than 90% of respondents assess the output gap as negative, indicating ongoing slack despite gradual improvement in activity.
Recession risk is viewed as contained but not trivial. Median estimates suggest a 20% to 25% chance of a recession over the next six to 24 months, reflecting continued uncertainty rather than an expectation of an imminent downturn.
Inflation expectations remain firmly anchored near the Bank of Canada’s 2% target. Median forecasts for headline CPI inflation stand at 2.1% for both the end of 2026 and 2027, with longer-term expectations converging on 2.0%. This consistency suggests confidence that inflation pressures will remain controlled.
Monetary policy expectations point to stability. The central tendency among respondents places the policy interest rate at 2.25% throughout 2026, with limited dispersion. Looking further out, some participants anticipate gradual increases, but overall expectations imply only modest tightening by late 2027. Opinions on rate risk are mixed, with half of respondents viewing risks as balanced and the remainder split between upside and downside scenarios.
Asset market expectations align with this steady outlook. Central estimates for government bond yields by the end of 2026 cluster around 2.7% for two-year bonds, 3.0% for five-year bonds and approximately 3.4% for ten-year bonds, though forecasts vary across respondents.
The survey underscores a macro environment defined by moderate growth, anchored inflation and limited near-term policy movement. Persistent trade-related risks remain the key uncertainty, reinforcing the importance of diversification and clear client communication in an environment of restrained economic momentum.
