RBC bumps up Canadian and US growth forecasts, sees Fed and BoC frozen through 2026
Lead — RBC's revised growth projections for Canada and the U.S. signal a notable shift. The Canadian economy's annualized GDP estimate for Q2 has been increased to 2.2%, driven by robust household spending and a recovering business investment landscape. Meanwhile, productivity gains are set to sustain U.S. growth at 2.2% in 2026 and 2027. As outlined in the full note source, the Bank of Canada is expected to maintain its rate at 2.25% until 2026, while the Fed's stance might need reassessment if inflation persists.
What the desk is arguing
The desk argues that the positive GDP revisions from RBC present a more optimistic view for both Canada and the United States. Per the full note, RBC attributes the Canadian growth forecast upgrade to resilient household spending amid rising gasoline prices, alongside recovering business investment and a positive net trade contribution.
In contrast to Canada's modest growth adjustments, the U.S. growth outlook reflects more structural changes, with RBC highlighting that U.S. productivity has consistently outpaced 2.5% annualized growth since early 2024. This situation suggests that both economies, particularly the U.S., may witness a more assertive trajectory in GDP growth through 2027.
Where it sits in our coverage
At the moment, we are targeting a USD/CAD range of 1.04 to 1.12, with a consensus at 1.075. The projections from firms such as jpmorgan at 1.10 and bofa at 1.04 for March 2026 illustrate a divergence in outlook.
The RBC forecast suggests a stronger growth narrative, placing it at the upper end of the spectrum in light of more rigorous economic signals from the U.S., while the Canadian outlook remains more tempered and stable.
How other firms see it
Firms such as jpmorgan and citi are aligned with RBC's optimistic takes on U.S. GDP growth, particularly emphasizing productivity advancements. In contrast, bofa presents a more cautious stance concerning Canadian economic performance and inflation risks.
Given the current dynamics, traders should monitor shifts in the USD/CAD pair, especially considering how both central banks may respond to evolving economic conditions and inflationary pressures.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01RBC raised Canadian GDP forecast for Q2 to 2.2% from 1.7%, citing strong household spending and investment.
- 02U.S. growth is projected at 2.2% for 2026 and 2027, bolstered by structural productivity gains.
- 03The Bank of Canada is expected to remain on hold at 2.25% through 2026, while the Fed's medium-term outlook faces inflation-related pressures.
- 04The forecast adjustments imply a potential divergence in monetary policy responses between Canada and the U.S.
Market implications
Watch for how the USD/CAD reacts to inflation data and central bank signals, particularly given RBC's stance that any persistent inflation in the U.S. could prompt a reassessment of Fed rates. Traders should keep an eye on cross-asset implications arising from increased U.S. productivity.
Risks to this view
Key risks to this outlook include sudden inflation spikes in the U.S. that would necessitate a more aggressive Fed response or any adverse shifts in Canadian economic fundamentals that might provoke a reconsideration of BoC policies.
RBC raised its Q2 Canadian GDP tracking estimate to 2.2% annualized from 1.7% previously. After two quarters of stagnation, the drivers are the usual suspects: resilient household spending (impressive given what gasoline prices did to buying power this spring), recovering business investment, and net trade set to add significantly. The annual 2026 number edges up to 0.7% from 0.6%, which isn't impressive but it's an uptick in the right direction in a country that's reversing immigration flows.
The Bank of Canada call is unchanged: on hold at 2.25% through 2026, then moderate hikes in 2027. RBC's thinking is that the unemployment rate is still high despite recent improvement, so a policy rate at the lower end of neutral remains appropriate. With growth firming and oil-driven inflation worries fading (though maybe not for long), they see less two-way risk on rates in the near term.
They think Wednesday's meeting will be a non-event. The US story is more interesting In contrast, they seen an American growht upgrade as structural. They highlight that labour productivity has been running above a 2.5% annualized clip since the start of 2024, and RBC has lifted GDP and potential GDP through 2027.
They see 2.2% growth in both 2026 and 2027 — driven by productivity. I suspect that could further compound in the following years as AI investments pay off. The Fed side is where the tension lives.
RBC keeps the funds rate at 3.5-3.75% through the end of 2027, but the risk language has clearly shifted. Core inflation is running well above target even stripping out energy, unemployment is historically low, and the June dot plot was tighter. Today's CPI report will strengthen RBC's resolve on the call.
RBC also flags the obvious risk: if non-energy inflation flares while unemployment stays low, Fed funds may not be restrictive enough, and the next move debate becomes about hikes. Under the hood, they have US 2-year yields grinding up toward 4.35-4.45% through 2027 from 4.18% today. USMCA Risks July 1 came and went without a formal extension of CUSMA, and the market shrugged — correctly, in RBC's view.
The deal doesn't mechanically expire until 2036, and negotiations on extending that deadline have begun. "Businesses seeking immediate resolutions will be disappointed" In any case, RBC estimates only about a third of Canadian exports to the US would face a 10% tariff if USMCA lapsed — not the full ~90% currently exempt — because other exemptions have expanded and the replacement tariff rate has trended lower. The tail risk has shrunk. This is where I differ from RBC.
I think businesses are slowly getting more comfortable with the tariff uncertainty and there could be a wave of business investment that leads to futher upgrades to Canadian growth. Central bank roundup BoE: RBC has thrown in the towel on further hikes after soft CPI, PMIs and wages. Steady at 3.75% "for the foreseeable future." ECB: They see one more in September to a 2.5% terminal, with the ECB expected to err hawkish despite the oil retracement.
RBA: With oil trending lower, RBC no longer sees enough inflation pressure to force them back into action. Done at 4.35% through the forecast. This article was written by Adam Button at investinglive.com.
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