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BoC Forecasts Show Better Inflation Progress And Mostly Softer Growth Outlook

CANADA
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  • Inflation forecast changes are mixed but ultimately net dovish: The increase from 2.2 to 2.4% for 2025 after an unchanged 2.6% in 2024 appears to reflect base effects. Instead, the end-year figures were revised 0.2pps higher to 2.4% for 4Q24 but then 0.1pp lower to 2.0% in both 4Q25 and 4Q26.
  • This is backed up by the newly released core CPI profile which is also seen at 2.4% in 4Q24, 2.0% in 4Q25 and 2.0% in 4Q26.
  • Quarterly GDP growth estimates unsurprisingly reflected historical downward revisions to Q4 and Q1 but then left Q2 unrevised at 1.5% and now indicate a strong 2.8% in Q3.
  • However, these prior downward revisions take their toll on near-term growth forecasts (4Q24 seen at 2.0% vs 2.1% prior) but notably there is then only similar momentum in 2025 (2.1% in 4Q25) before an acceleration through 2026 (2.5% vs 1.9% prior) aided by labour productivity growth.
  • That would see above-trend growth only out in 2026 as “Potential output growth is projected to slow from roughly 2¼% in 2024 to a more modest average of 2% over 2025 and 2026. This moderation reflects expected changes in the inflow of non-permanent residents.”
  • The current assessment on the output gap doesn’t offer many surprises, it has shifted from -0.5 to -1.5% range estimated for Q1 to now -0.75% to -1.75% for Q2.

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  • Inflation forecast changes are mixed but ultimately net dovish: The increase from 2.2 to 2.4% for 2025 after an unchanged 2.6% in 2024 appears to reflect base effects. Instead, the end-year figures were revised 0.2pps higher to 2.4% for 4Q24 but then 0.1pp lower to 2.0% in both 4Q25 and 4Q26.
  • This is backed up by the newly released core CPI profile which is also seen at 2.4% in 4Q24, 2.0% in 4Q25 and 2.0% in 4Q26.
  • Quarterly GDP growth estimates unsurprisingly reflected historical downward revisions to Q4 and Q1 but then left Q2 unrevised at 1.5% and now indicate a strong 2.8% in Q3.
  • However, these prior downward revisions take their toll on near-term growth forecasts (4Q24 seen at 2.0% vs 2.1% prior) but notably there is then only similar momentum in 2025 (2.1% in 4Q25) before an acceleration through 2026 (2.5% vs 1.9% prior) aided by labour productivity growth.
  • That would see above-trend growth only out in 2026 as “Potential output growth is projected to slow from roughly 2¼% in 2024 to a more modest average of 2% over 2025 and 2026. This moderation reflects expected changes in the inflow of non-permanent residents.”
  • The current assessment on the output gap doesn’t offer many surprises, it has shifted from -0.5 to -1.5% range estimated for Q1 to now -0.75% to -1.75% for Q2.