Will the Bank of Canada Cut Rates in December or Wait Until 2026?
With inflation cooling down and shifts in immigration and labor dynamics, markets are questioning whether the Bank of Canada (BoC) will implement another rate cut in December or maintain current rates until 2026.
Economic Backdrop: Balancing Growth and Stability
Canada's economy is currently in a fragile state. The BoC has already reduced interest rates by 2.75% in this cycle to support slowing growth while avoiding a resurgence of inflation. October’s jobs report revealed an unexpected increase of 67,000 jobs and a decline in the unadjusted unemployment rate to 7.0%, demonstrating ongoing strength in the labor market.
Private sector jobs accounted for the increase, adding 73,000 positions, although most were part-time. Year-over-year wage growth rose to 3.5%, slightly up from September's 3.3%.
Economists believe this stability provides the central bank with the opportunity to hold off on immediate action. As noted in the commentary from October, “The labour market is softening, but it is not weak enough to warrant another immediate cut.”
The Immigration Factor: Growth Risks Re-defined
A new and under-appreciated variable may change the Bank’s calculus, Canada’s revised immigration policy. The current policy vastly reduced levels of immigration, and resulting population growth, when compared to the pandemic policy of bolstering economic growth by adding population.
The federal government, led by Mark Carney, now plans to reduce the number of temporary residents by 43% between 2025 and 2026, aiming to bring their share to below 5% of the total population by 2027.
Ottawa plans to expedite the permanent residency process for approximately 148,000 individuals, including protected persons and workers. However, this initiative is expected to significantly slow population growth, potentially reaching near zero by 2026–2027, according to Capital Economics.
A smaller population base can lead to several consequences:
Lower potential economic growth (GDP), which could weaken long-term demand.
A decline in employment growth, which may even turn negative, coupled with an increasing number of retired baby boomers. This could result in lower unemployment rates, despite the absence of new job creation, as the labour force shrinks.
This situation could unexpectedly tighten the labour market, increasing inflationary risks and causing the Bank of Canada (BoC) to be cautious about lowering interest rates too quickly.
Policy Implications: December or 2026?
Short-term (December 2025)
Recent data on jobs and wage growth has been stronger than expected, indicating that an immediate interest rate cut may not be warranted. The Bank of Canada’s October statement suggested that a rate of 2.25% could serve as an appropriate neutral level if current forecasts remain accurate.
Medium-term (2026)
An increase in immigration could lead to a tightening of the labor market, potentially delaying further rate cuts into 2026. Conversely, if population growth stalls, the Bank may encounter a unique challenge: while macroeconomic forces may be disinflationary, labor constraints could exert inflationary pressures.
There is a significant risk the Bank will be unable to continue cutting rates next year due to Ottawa's new immigration targets. These targets may lead to a rapid decline in unemployment and contribute to persistent inflation.
The Bottom Line
Market pricing currently reflects a less than 30% chance of a BoC rate cut in December, with most economists expecting the next move in mid-2026, barring a sudden downturn or global shock.
Mortgage strategists caution that “rates don’t have much more room to drop,” implying homebuyers and borrowers should not expect near-term relief.
Summary:
December rate cut? Unlikely.
Early 2026? Possible, but only if growth falters faster than expected.
Structural driver: The immigration slowdown could redefine Canada’s economic trajectory, keeping the BoC patient and inflation-watchful.
Bank of Canada Rate Forecast FAQs
Because fewer new workers, coupled with retiring baby boomers, will lead to a shrinking workforce. If the number of jobs remains constant, this can push unemployment down and wages up, even if the economy slows or contracts. That makes inflation harder to control.
After several cuts, it stands at 2.25%, considered near the neutral range. The next policy rate decision is scheduled for December 5th.
The BoC typically mirrors the U.S. Fed to avoid sharp exchange-rate shifts that could affect exports and inflation. The BoC doesn't move in lockstep with the U.S. Fed but since rate differentials can impact exchange rates. Since 85.7% of Canadian exporting enterprises sell to the U.S. market, the BoC is cautious not to disrupt trade.
Buyers may benefit. Slower immigration may cool rental and housing demand, providing buyers with more choice and allowing them to negotiate better terms.
