Bank of Canada Seen Holding Rates Through 2026 as Business Inflation Expectations Ease to 3.3%

The Bank runs two very different instruments and releases them together. The Business Outlook Survey summarizes in-depth interviews with senior leaders at roughly 100 firms chosen to reflect Canada's GDP mix, according to the Bank of Canada. The Canadian Survey of Consumer Expectations is a quarterly poll of household views on inflation, the labour market, and personal finances.

Starting this quarter, the Bank split the business survey into two cleaner summary gauges: an activity indicator, which tracks firms' outlooks for sales, investment, and hiring, and a price indicator, which tracks input prices, selling prices, wages, and expected inflation. The point of the split is that the two can move in opposite directions during a shock — prices heating up while activity holds steady — and the separation makes that divergence legible instead of muddy.

That distinction is the whole story this quarter. The surveys captured a moment of hot prices and steady demand at the same time, which is precisely the mix that leaves a central bank with no clean direction to move.

The survey window matters. The Q2 business survey was fielded in early-to-mid May, when West Texas Intermediate crude was averaging around US$101 a barrel amid conflict in the Middle East. Firms answering under those conditions pushed their near-term price expectations up. Then oil came off the boil.

By June, the Bank's monthly Business Leaders' Pulse showed one-year-ahead inflation expectations falling to 3.3% from 3.9% in April, according to RBC Economics — only marginally above the roughly 3% reading from February, before the oil shock. The longer horizons told an even calmer story. Two-year expectations normalized fully to 2.8%, matching February, and five-year expectations stayed anchored through the entire episode.

Anchored long-term expectations are what central bankers watch most closely. A one-off commodity spike is tolerable; expectations that inflation will stay high are not. The survey showed the former without the latter. Reinforcing that, among firms reporting cost increases tied to the Middle East conflict, 40% were absorbing the higher costs rather than passing them to customers, and only about a third were passing them through fully.

A weakening economy would hand the Bank a reason to cut. The surveys did not show one. Business investment intentions strengthened again in Q2, marking the strongest first half of a year since 2022, with particular strength among natural-resources firms and those tied to public spending. Firms reported solid past sales, even as they expected slightly slower growth ahead.

The picture was not uniformly strong. Hiring intentions softened, consistent with firms reporting fewer binding labour shortages, and consumer spending intentions cooled among businesses with weaker sales outlooks. But the Bank's own read described a mixed supply-shock quarter — higher oil prices lifting price outlooks while weighing on activity outside the Prairies — rather than a one-directional signal. Its own summary of the Q2 Business Outlook Survey framed sentiment as softer but investment as resilient.

RBC's bottom line was blunt: with growth picking up in Q2 after a stagnant winter and core inflation pressures remaining subdued in the latest data, the case for the Bank to move in either direction is weak. On that basis, the bank reaffirmed its expectation that the policy rate stays unchanged through 2026. Global oil prices had, in RBC's words, normalized significantly since mid-June, easing worries about both secondary inflation effects and demand destruction from expensive energy.

That interpretation sits comfortably alongside the Bank's own recent posture. In its June 10 decision, Governing Council held the rate at 2.25% and said total inflation would likely hover around 3% in the near term before easing toward 2%. The policy rate has now held steady across January, March, April, and June — the kind of streak that defines a central bank on pause rather than one mid-cycle. Our coverage of that June hold and the hike-or-hold debate laid out how finely balanced the risks had become; the July surveys nudged that balance toward stability.

Here is where a survey about business sentiment reaches your kitchen table. The Bank's policy rate is, in its own words, the starting point for the interest rates that matter to Canadians — it feeds the prime rate that prices variable mortgages and lines of credit. A parked policy rate means a steadier prime, and a steadier prime means the ground under a renewal decision stops shifting.

The renewal question is live for a lot of households right now. The Bank's most recent Financial Stability Report noted that the last of the pandemic-era five-year fixed mortgages — about 12% of all outstanding mortgages — will renew over the coming year, with those borrowers facing payment increases averaging around 15%. Another roughly 14%, made up of variable and shorter-term fixed mortgages taken out after rates rose, will on average see little change at renewal. CMHC has separately described 2025 as the peak of the renewal wave, easing through 2026 but still leaving most renewers facing higher costs than their original term.

Set against flat rates, the calculus changes. When both variable and longer fixed mortgage rates are moving in a narrow band — as recent Bank lending data show they have been — the choice is less a directional bet and more a question of which stability profile fits your budget. The "wait for lower rates" trade that made sense two years ago has largely played out. For a deeper look at how renewers are navigating this, see our reporting on the prolonged 2.25% hold and rising fixed rates.

None of this is a recommendation to lock in or float — that depends on your own timeline and tolerance for payment swings. It is simply the terrain the July 6 surveys describe: a Bank with no pressing reason to move, and a rate environment where certainty, not the next cut, is the thing most within reach.