Financial market participants believe the Bank of Canada will hold interest rates at their current level of 2.25 per cent before raising them to 2.50 per cent in the third quarter of 2027.
However, 63.3 per cent said the “risked were skewed to a lower path.”
Those were some of the findings of the Bank of Canada’s quarterly survey of 30 financial market participants, which includes dealers and banks, asset and pension fund managers, insurers and researchers, conducted Sept. 9 to Oct. 1.
In the previous survey, released in August, respondents said they expected the Bank of Canada to cuts rates to 2.25 per cent and then hold there until 2026.
The central bank cut interest rates to 2.25 per cent on Oct. 29, and said rates were at the right level to support the economy without spurring inflation.
Bank of Canada governor Tiff Macklem also said that monetary policy could only do so much of the heavy economic lifting, given structural changes caused by the trade war with the United States.
Last week, Prime Minister Mark Carney’s government released its first budget, which laid out spending that will raise the federal deficit to $78.3 billion in the 2025-26 fiscal year, as Ottawa seeks ways to protect Canada’s economy from tariffs.
The central bank’s third-quarter survey was conducted prior to the breakdown in trade talks between the U.S. and Canada that happened after U.S. President Donald Trump took offence to an anti-tariff ad run by the Ontario government.
Market participants were also asked about the possibility of a recession and their outlooks for gross domestic product (GDP), inflation, the Canadian dollar and the price of oil.
Survey respondents’ median expectations put the chances of a recession in Canada over the next six months at 35 per cent, the same odds as the second-quarter survey, but up significantly from the 20-per-cent chance cited in the third quarter of 2024.
The survey revealed some deterioration in the outlook for the economy.
For example, the 25th percentile of responses placed the odds of a recession at 20 per cent compared with 10 per cent in the same period last year. Meanwhile the 75th percentile assessed the probability of a recession at 35 per cent, the same as a year ago.
A recession is defined as two consecutive quarters of contracting economic growth.
Meanwhile, the median forecast GDP to come in at 0.6 per cent year over year in 2025, rising to 1.7 per cent by the end of next year.
Respondents also identified upside and downside risks to their forecasts. The former includes easing trade tensions, larger-than-expected fiscal stimulus and Bank of Canada rate cuts. The latter includes an increase in trade tensions, weaker consumer spending and a weaker housing market.