Canada Economics: Domestic risks to our inflation outlook

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Canada Economics: Domestic risks to our inflation outlook

Canada Economics

15 July 2026 Citi Research

But despite slightly more dovish steps away from hikes and possibly towards rate

cuts, BoC forecasts and the communications around those forecasts were very

optimistic in our view. Officials expect a return to growth in Q2 (as do we) and that

a broadening in growth will be sustained in the second half of the year (we

disagree). Headline inflation forecasts in the updated July MPR are a bit lower than

our own latest CPI forecasts, but we expect core inflation to remain at or below 2%.

Of course, we do not base our forecasts for growth, inflation, or policy rates on the

BoC’s forecasts. MPR forecasts have consistently revised growth lower over the last

few years. We agree with BoC officials’ assessment that the initial drag on activity

from trade developments weighing on exports has started to fade, and that

businesses will likely adapt to persistent uncertainty.

But we think officials are underappreciating that markets implicitly delivering up to

50bp of rate hikes in recent months will be a new headwind for activity. To us, the

most timely data (June jobs/hours worked, soft June CFIB demand) suggest growth

will continue to run below potential in data received after this meeting.

Figure 1. We expect softer growth than in BoC officials’ Figure 2. We do not expect a sustained pickup in activity

latest forecasts into the second half of the year

Near-term Forecasts Average Annual

Forecast GDP YoY Actual Hours Worked YoY

Q2-2026 Q3-2026 2026 2027 6

CPI Inflation (%YoY)

Jul MPR 3.0 2.5 2.5 2.0 5

Apr MPR 2.6 NA 2.3 2.1

4 Citi 3.0 2.8 2.6 2.1

Real GDP (%YoY)

Jul MPR 0.8 0.7 0.7 1.8 YoY

Apr MPR 1.2 NA 1.2 1.6 % 2

Citi 0.9 0.4 0.5 1.5

Real GDP (%QoQ SAAR) 1

Jul MPR 2.5 1.5 NA NA