Desjardins Says Bank of Canada's Description of Economic Conditions Now "Much More" Guarded, Sounds Less Concerned on Inflation Upside Outlook

10:39 AM EST, 01/28/2026 (MT Newswires) -- The Bank of Canada held rates steady at 2.25% on Wednesday for the second time in a row, as was widely expected, said Desjardins.

Central bankers also reiterated that they see the current policy rate at about the right level to keep inflation close to their target, signaling that officials continue to expect interest rates to remain unchanged over the next few months, noted the bank.

That said, the policy statement made more of a point to say that this guidance is conditional on the economy evolving broadly as expected -- a nod to the significant uncertainty embedded in the forecast. Desjardins continues to believe that the risks to interest rates are skewed to the downside in the first half of this year.

Governing Council repeated that it's still very difficult for them to predict the timing or even the direction of the next rate move. This is all consistent with our view that the Bank of Canada sounded too certain late last year about the trajectory of the economy and rates, which has now been corrected.

Central bankers assume the economy stalled in Q4 2025, which is consistent with the bank's own tracking. While the BoC penciled in a rebound for early this year, its projections point to just 1.1% growth for 2026 as a whole.

In addition to the uncertainty regarding the CUSMA review, central bankers pointed to the elevated unemployment rate and firms' hesitancy to hire or add more capital as evidence of the economy's fragile state. The slowdown in population growth also plays a role in the modest growth anticipated this year.

The Monetary Policy Report (MPR) left the estimate for the output gap unchanged from the October Report at -1.5% to -0.5%, with slack only gradually being absorbed due to the slow economic recovery. That leaves ample room for a downside shock to spur the BoC back into rate action with further rate cuts, added Desjardins.

Governing Council sounded less concerned about upside risks to the inflation outlook, with the MPR stating that inflationary pressures have eased, pointed out the bank. The Bank of Canada pointed to the deceleration to below 2% in the three-month annualized rates of core inflation measures.

Even on headline inflation, central bankers sounded optimistic that some of the recent drivers will prove temporary. Policymakers expect food price inflation, which has been a major contributor to recent increases in headline CPI, to ease because growth in input costs has slowed. More broadly, the MPR says, "Most cost indicators are now rising at a pace broadly consistent with inflation around 2%."

These sentiments are completely consistent with the expectation of Desjardins that the BoC would sound less concerned on Wednesday about upside risks to inflation and more concerned about downside risks to growth.

As a result, the bank believes that it's difficult to make a strong case for rate hikes this year. In the near-term, risks to the policy rate are tilted to the downside, particularly with the CUSMA review expected to be volatile.

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