1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 52
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
second scenario involves targeted revisions, particularly tighter rules of origin and supply-chain
requirements aimed at limiting third-country inputs, which could benefit some Canadian
producers through more North American sourcing but also raise costs and force short-term
adjustments for firms dependent on global inputs. A third scenario sees political tensions spilling
into the review, with the U.S. using the process to strong arm Canada on sensitive areas such as
dairy supply management or other regulatory issues, increasing uncertainty and potentially
weakening outcomes for protected sectors. In the least constructive outcome, delays or a
contentious review could prolong uncertainty even without a formal collapse of the agreement,
discouraging investment and prompting firms to hedge by diversifying supply chains away from
North America. Alternatively, the parties may elect to muddle through in order to avoid a fullblown renegotiation before the U.S. midterms by letting the agreement continue under its builtin review/extension provision. Under the provision, the parties hold a joint review in 2026. If they
fail to jointly confirm a 16-year extension, the agreement does not end immediately. Instead, it
shifts into annual joint reviews for the remainder of the term (to 2036) during which the parties
can still agree to extend at any point during that rolling window.
On the monetary policy front, the BoC resumed policy easing by cutting the overnight rate by 25
bps at each of its September and October meetings, bringing the overnight rate to 2.25%, the
lower end of the 2.25-3.25% range the BoC estimates to be the equilibrium policy rate – that is,
the rate that neither stimulates nor restrains demand, allowing the economy to operate at its
potential level. The real policy rate is at about zero, while broader financial conditions are
relatively easy as reflected by the 5-year Government of Canada bond yield which, as at the end
of 2025, was sitting just shy of 3%, well below the post-pandemic high of 4.4%.
In our view, the bar for further policy easing is high and would require a significant economic
shock for officials to consider further cuts. We believe officials will remain in an extended holding
pattern for the next several meetings, with the potential for a couple of hikes in the back half of
2026 that would bring the nominal policy rate to 2.75%, the midpoint of the equilibrium range
estimate. A supportive fiscal backdrop on a combined federal and provincial basis also reduces
the need for aggressive monetary easing and reinforces the case for a data-dependent approach.
Commodity prices, particularly oil, remain a key source of uncertainty for this outlook, however.
Given that Canada is a major commodity exporter, it is exposed to energy-driven swings in both
growth and inflation, which could either reinforce or deter the BoC’s ability to easy policy further.
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