RBC Economics upgrades Canada's Q2 growth forecast though the Bank of Canada is poised to hold rates steady
Canada's economy has shaken off two quarters of stagnant activity and is now tracking a meaningful rebound in the second quarter of 2026, according to a forecast update by RBC Economics senior economist Claire Fan.
The recovery is being driven by resilient household spending, a pickup in business investment, and expanding net trade — a combination that prompted Fan to revise Canada's Q2 annualised GDP growth estimate upward to 2.2% from a prior 1.7%.
For mortgage brokers navigating a client base weighed down by affordability pressures and renewal anxiety, the upgrade is welcome. But the implications for interest rates are more measured.
The Bank of Canada (BoC), which has held its overnight rate at 2.25% since October 2025, is expected to stay put through the remainder of 2026.
Fan's full-year growth projection edged up to 0.7% from 0.6% — a recovery that, while genuine, remains too fragile to warrant tighter monetary policy.
"We see less risk of higher or lower interest rates in the near term, as growth picks up while oil-related inflation concerns ease," the report said.
Consumer spending has proven resilient over a period of high gasoline prices cutting into households' buying power, Fan wrote. Business investment has strengthened, and net trade is set to add significantly to growth.
Canada's unemployment rate, however, remains high despite recent improvements — a signal, Fan noted, that "interest rates at the lower end of the estimated neutral range are still appropriate."
The Bank of Canada is broadly expected to keep its overnight rate at 2.25% at Wednesday's July 15 policy announcement — a sixth consecutive pause following 50 basis points of cuts in September and October 2025, according to analysis from RBC Economics.https://t.co/QiVjpFb12B
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 13, 2026
CUSMA cushion holding — for now
The July 1 joint review of the Canada–United States–Mexico Agreement (CUSMA) passed without a formal extension, but Fan's report stressed this is no cause for alarm.
"CUSMA remains in effect despite a lack of formal extension on July 1," the report said.
"The deal won't mechanically expire until a decade from now, and negotiations to extend that deadline have begun."
Fan estimated that under current US tariff schedules, roughly a third of Canada's exports would face a 10% tariff should CUSMA lapse. That's well below the near-total exposure an unprotected collapse would imply, and considerably less than the approximately 90% of Canadian exports that currently benefit from duty-free treatment.
"While an earlier termination is possible, it's not our base case assumption," the report said, "and its economic impact has grown less dire as US tariffs broadly continue to ease."
Future negotiations, Fan wrote, may centre on rules of origin requirements or alignment with US trade policy, though she anticipated little tangible change in the near term.
Notably, the tariff rate that would replace CUSMA has trended lower over recent months, and the share of CUSMA-protected trade has also shrunk as other tariff exemptions expand, a development that has reduced the stakes of any eventual lapse.
Rate path: steady in 2026, modest hikes on the horizon
Fan's report maintained that the BoC will hold rates steady through all of 2026 before hiking modestly in 2027, contingent on the economy and labour markets improving without stoking inflation.
The BoC held its overnight rate at 2.25% in June, the report noted, with Governor Tiff Macklem reiterating that "the current stance of monetary policy remains appropriate to balance the growth-inflation trade-off."
Recent developments, such as stronger growth and lower oil prices, "should have eased concerns on both sides of that trade-off," Fan wrote.
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