National Bank of Canada analysts report that weaker Canadian data, lower inflation and higher trade uncertainty have reduced the chances of Bank of Canada rate rises in 2026. They now expect any policy tightening to be delayed until at least early 2027.
They state that a route to 2026 rate hikes remains, but it is now less likely. They add that if the Bank of Canada shifts towards more rate cuts, they would not expect that before late this year.
They project that unchanged monetary policy would keep Canadian Government bond yields broadly steady through 2026. They also indicate Canadian yields may still outperform global peers, including US Treasuries, UK gilts and Japanese government bonds.
The article notes it was produced with the help of an artificial intelligence tool and reviewed by an editor.
The path for a 2026 Bank of Canada rate hike has become much narrower. We see this reflected in recent data, with January’s inflation report showing a cooler 1.9% reading and GDP growth having stalled in the final quarter of 2025. This reinforces the view that the central bank will delay any tightening until at least early 2027.
Given that status quo monetary policy is likely, we expect bond yields will tread water for the remainder of the year. Traders should consider positioning for this low-volatility environment by selling options on BAX or CGB futures to collect premium. Receiving fixed on short-term interest rate swaps is another way to express the view that the market has overpriced the odds of a hike.
From a risk management perspective, we continue to favour Canadian rates over global peers like U.S. treasuries. The yield on the 10-year Canadian Government bond has already outperformed its U.S. equivalent by 15 basis points since the start of the year. This outperformance is likely to continue amid rising global trade uncertainty.
This shift in rate expectations makes the Canadian dollar less attractive, which has already slipped below 0.73 USD. We should anticipate further weakness in the currency as long as the Bank of Canada remains on hold. This view could be expressed by shorting CAD futures or buying call options on the USD/CAD pair.
