Desjardins Sees Bank of Canada Toning Down Rhetoric About Upside Inflation Risks, to Up Concern on Downside Growth Risks

07:56 AM EST, 01/27/2026 (MT Newswires) -- Three months ago, the Bank of Canada declared its rate-cutting cycle was effectively over, said Desjardins.

Despite all of the uncertainty facing the economy, central bankers confidently concluded that they had done enough to keep inflation at its 2% target, noted Desjardins. The decision to communicate their intentions so clearly had an immediate impact on markets, causing the odds of further rate reductions to collapse.

With that guidance in hand, market participants actually began to price in rate hikes for 2026. From the bank's perspective, those bets placed too much faith in the BoC's ability to forecast the economy.

After initially cooperating, the data began to deteriorate. Over the course of the past few weeks, analyst forecasts for Q4 2025 gross domestic product have fallen to an "anemic" 0.5%. Desjardins' tracking for Q4 is even weaker.

When policymakers first issued their guidance on rates, underlying inflation appeared to be tracking 2.5%. Inflationary pressures now look much tamer, trending around the 2% target, according to the bank's calculations.

The BoC's October projections had assumed a lot of additional inflation from large cost pressures associated with trade disruptions, reconfigured supply chains and international tariffs, including those in the United States. However, underlying goods price inflation looks weak.

Desjardins expects the January Monetary Policy Report -- to be presented Wednesday with the BoC's policy decision -- to downgrade the impact of these cost pressures on inflation, which should more than offset any upgrade from the narrower output gap starting point.

As a result, the bank predicts the BoC to project inflation will settle back down to the 2% target by the end of 2026, leaving policymakers more scope to cut rates should conditions unexpectedly deteriorate.

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