BMO Says Bank of Canada Will Need A "Material" Shift in The Outlook to Prompt A Change in Rates

11:56 AM EST, 01/28/2026 (MT Newswires) -- The Bank of Canada kept its key interest rate unchanged at 2.25% on Wednesday for the second meeting in a row, as was universally expected, said Bank of Montreal (BMO).

The tone of the statement and the updated forecasts also provided few surprises, as the BoC suggests that the outlook is too uncertain to seriously revise the economic view and/or to give much guidance on when and where rates are going next, noted the bank.

There is really nothing here to shift the call that the BoC will be on hold for the rest of 2026, although BMO continues to assert that if there is a move, it's much more likely to be a rate cut rather than a hike this year.

The BoC indicated that the forecast for growth and inflation has not changed significantly from the October Monetary Policy Report. It estimates that gross domestic product stalled in Q4, but will return to a respectable 1.8% pace in the current quarter and average 1.1% for all of 2026 -- that's a bit below consensus, as well as BMO's estimate of 1.4%.

For the record, the BoC is also much more cautious on 2027, at 1.5% growth versus the bank's 2.2% estimate, even as it essentially assumes that an agreement will be reached on USMCA. The bank expects domestic demand to perk up gradually, while net exports remain erratic.

However, there's caution on the labor market with the 6.8% unemployment rate still deemed high and hiring intentions weak.

Curiously, the bank hasn't changed its estimate of the output gap at all (-0.5% to -1.5%), despite large upward revisions to real GDP since the prior MPR. That square was circled by also revising up potential growth heavily over the past few years, BMO pointed out. Looking ahead, the BoC sees potential growth cooling to just above 1% amid the steep slowdown in population growth.

On the inflation outlook, there was a subtle shift as the BoC is now talking about inflation being "close to the 2% target" and expected to stay there in 2026. Gone is the narrative about underlying inflation being "around 2.5%." Indeed, the point estimate for consumer price index inflation this year is 2.0%, a full half-point below BMO's call, which is above consensus.

The BoC's view on inflation is a "tad dovish," according to the bank.

Canada's central bank remains quite comfortable with where policy rates are for the time being, but vows that it's "prepared to respond," if need be. The opening statement reiterates that "elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate".

It's clearly going to require a "material" shift in the outlook to prompt a change in rates, but given the highly uncertain trade backdrop, a material shift is quite possible, added BMO.

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