Canada's economy is evolving broadly in line with expectations, with activity rebounding after an early-year soft patch, allowing Scotiabank Economics to predict the Bank of Canada will begin gradually hiking rates toward the end of 2026.
April gross domestic product rose a stronger-than-expected 0.5% on the month, while labor market conditions are improving sooner than expected, wrote the bank in a note Monday.
Scotiabank maintains its 2026 growth forecast of 0.9%, with momentum building as rate cuts support demand and government spending picks up. Growth is expected to accelerate to 2.2% next year.
The U.S. decision not to renew the U.S.-Mexico-Canada Agreement on trade by the July 1 deadline doesn't materially alter the bank's outlook, as Canadian exports remain protected under the existing framework.
"One area we continue to monitor closely is underlying inflation," wrote Scotiabank in the note.
Headline inflation remains contained, but firmer core inflation and persistent cost pressures point to ongoing risks around a sustained return to target, added the bank. Lower oil prices should provide some near-term relief, though upside inflation risks remain.