Unemployment drop expected to keep BoC on hold for 2026

Canada’s jobless rate slipped to 6.5% in January, its lowest level since September 2024. The move is expected to strengthen the case for the Bank of Canada to sit tight on interest rates through 2026 rather than deliver more relief for borrowers.

Statistics Canada reported that the decline was driven not by hiring, but by fewer Canadians looking for work, sharpening questions about how much slack really remained in the labour market.

Unemployment fell 0.3 percentage points from December’s 6.8% as the number of people searching for work dropped by about 94,000, or 6.1%.

The participation rate slid 0.4 percentage points to 65%, with much of the pullback concentrated in Ontario. Employment, meanwhile, decreased by roughly 25,000 on the month, and the employment rate edged down to 60.8%, its first decline since August 2025. Manufacturing bore the brunt of the hit, shedding about 27,500 positions, most of them in Ontario, as United States tariffs continue to weigh on factory payrolls.

Job losses masked by shrinking labour force

“Canada's job market started the new year on a mixed note. The economy lost jobs, but the unemployment rate still fell as fewer people looked for work last month,” Tony Stillo, director of Canada economics at Oxford Economics, said. He added that employment decreased by 25,000 in January and that “the employment to population ratio edged down 0.1ppt to 60.8%, its first dip since August.”

However, Stillo said the jobless rate still moved lower as “slower population growth and a large drop in the participation rate caused the labour supply to shrink by around 90,000 m/m,” the biggest monthly decline since January 2022, when lockdowns pushed many people out of the labour force.

“We've long highlighted that a shrinking labour supply would put downward pressure on the unemployment rate, and that trend will likely persist as the population shrinks in the months ahead,” he said.

Rate path seen steady – and what it meant for mortgages

Stillo said more job losses are likely in the first half of 2026 as “still elevated trade policy uncertainty and US tariffs combine with weak domestic demand to curb employment demand and trigger modest layoffs,” with job growth resuming only around mid‑year and the renegotiation of United States-Mexico-Canada agreement (USMCA) on July 1 described as “pivotal.” 

He also said that, like the central bank, Oxford Economics still sees slack in the labour market and “expect the BoC to remain on hold though 2026, before lifting the overnight rate back to 2.75% by mid‑2027.” 

The Bank of Canada already held its policy rate at 2.25% at its January 28 decision, judging that the current setting was “appropriate” as long as the outlook for modest growth and near‑2% inflation stayed intact.

Market economists, including RBC and TD, similarly expect a prolonged hold through 2026, warning that unpredictable US tariffs and the USMCA review make any sudden move unlikely.

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No sign of a quick 2026 turnaround in Toronto's housing market, warns TRREB

Toronto’s housing market started 2026 on the back foot, with fresh numbers from the Toronto Regional Real Estate Board (TRREB) pointing to a quieter, more buyer-friendly landscape, and little sign of a quick turnaround.

Home sales in the Greater Toronto Area fell 19.3% year over year to 3,082 transactions in January, while the average selling price dropped 6.5% to $973,289. The MLS Home Price Index composite benchmark slipped 8%.

New listings were also lower, down 13.3% to 10,774, and active inventory rose 8.1% to 17,975 as properties stayed on the market longer.

“January’s market data reflect a continuation of a slower start to the year compared to a year ago, as affordability challenges and economic uncertainty remain top of mind for many buyers,” TRREB said.

Market balance tilted further toward buyers, with average days on market rising to 45 from 37 and property days on market climbing to 67 from 55.

“While there are signs that some buyers are taking advantage of a broader selection of homes and more balanced conditions, home sales continue to be suppressed relative to early 2025 as market participants adapt to the current interest rate environment,” TRREB said.

Sales drops were broad-based: detached transactions fell 13.6%, semis were down 19.2%, townhouse sales declined 23.7% and condo apartment sales slid 26%.

Prices also softened across the board, with detached values down 7.4%, semis down 9.7%, townhouses off 9.4% and condo prices down 9.8%.

Meanwhile, an Ipsos survey in the board’s 2026 Market Outlook found only 22% of GTA households intend to buy this year, down five percentage points from 2025, even as TRREB projected 60,000 to 70,000 sales and an average price range of $1 million to $1.03 million. 

TRREB president Daniel Steinfeld said “affordability has improved, but uncertainty continues to weigh on long term decisions like homeownership,” adding that “greater economic clarity in the months ahead could restore confidence and help unlock demand that has been building for several years.”

Despite this, new survey across Vaughan, Mississauga, Brampton, Durham Region and Simcoe County shows overwhelming concern about housing costs and strong support for cutting government-driven charges on new construction.

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Why a flurry of rate cuts is a real possibility under Trump's new Fed chair

Kevin Warsh, President Trump’s choice for next Federal Reserve chair, can’t simply snap his fingers and move interest rates dramatically lower – that much is clear.

But the influence the leader of the Fed can exert over fellow decisionmakers, many of whom look to the chair for direction on rate policy, suggests Warsh may have less trouble convincing members of the Federal Open Market Committee (FOMC) to vote for rate cuts than some analysts believe, according to a top mortgage lawyer.

Marty Green (pictured top), principal at Polunsky Beitel Green, told Mortgage Professional America he doesn’t necessarily subscribe to the view that Warsh, as just one of 12 FOMC members, would be blocked from pushing through cuts by a hawkish majority on the committee.

“I think one of the dynamics about the Fed that’s really interesting is that if you feel strongly as a current governor or one of the committee participants, you certainly are entitled to vote your conscience, and we see people do that with dissents from time to time,” he said.

“But generally, they kind of operate pretty unanimously for the most part and I think that’s partly because there’s a protocol that if you’re on the fence about it or you see possibilities both ways, you have a tendency to vote with the chair. And so I think that’s to some extent where that is going to come into play and be more important – those votes where people could see some case for cutting rates.”

Will Fed members continue to follow the leader under Warsh?

Current Fed chair Jerome Powell, whose term expires in May, has taken a careful approach to rate policy in recent years, frequently drawing Trump’s ire for refusing to consider big reductions.

FOMC members have generally endorsed that approach, with only two – Stephen Miran and Christopher Waller – voting against last week’s decision to hold rates steady instead of cutting by 25 basis points.

Warsh, though, will be expected by Trump to take a more dovish approach and advocate lower rates – and Green sees other Fed decision-makers being receptive to that view.

“If the chair is voting towards cutting rates, [other FOMC members] may follow suit,” he argued, “just because I think they see that as an important element of the Fed – to act as unanimously as possible and so that protocol may be followed.”

That’s not to say they’ll be easily swayed. Much will depend, Green said, on how quickly Warsh is able to establish credibility with other committee members and how strong his argument is that rates could be lower.

Warsh’s time as a member of the Fed’s board of governors between 2006 and 2011 could prove helpful, Green said, giving him more of an understanding of the central bank’s inner workings than some of the outsider candidates who were reportedly in the race to succeed Powell.

And a shift away from Powell may also mean a change in how the Fed judges the economy’s current health and where it’s headed in the coming months.

“I think Warsh may be wanting to look at additional data and bring a fresh perspective of what might provide better guidance for where the economy is going in the future,” Green said. “He’s certainly been critical of how the Fed has done things in the past, which is one of the reasons that I think he was attractive to the president.

“So I do think there will be some change in terms of how they view data, what data they look at, and how much weight they give to it.”

Expect a big push by Warsh to bring other FOMC members on board

Warsh’s first meeting as Fed chair – if he’s confirmed – is scheduled to take place in June. Markets currently see that decision as the likely first rate cut of the year, although Green said it might take longer for Trump’s choice to bring the other FOMC members around to his way of thinking.

“I don’t know that he’ll be able to change their opinion at the first meeting,” he said, “but how he presents the data at the first meeting may actually set the stage for… perhaps doing a cut [later] and maybe doing a more significant one if they delay it.”

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What Trump’s Fed pick means for Canada

Donald Trump ended months of speculation last week by naming his choice to lead the Federal Reserve when current chair Jerome Powell’s term expires in May, a decision that could have big implications for Canada.

The president announced on Friday he had chosen Kevin Warsh – a former bank executive and member of the Fed’s board of governors in the late 2000s – to head the central bank, ending a race that was closely followed by Canadian financial and mortgage market watchers.

The Fed’s approach to interest rates strongly impacts US Treasury yields, which in turn have a big effect on Government of Canada bond yields and, by extension, Canadian fixed mortgage rates. That means even though the Fed doesn’t decide policy for Canada, its decisions set the backdrop for mortgage rates here.

It’s also significant because a big divergence between the Fed and the Bank of Canada can put pressure on the loonie – and Trump has long advocated much steeper US rate cuts, which could leave the Fed substantially more dovish than the Bank of Canada if policymakers in Ottawa stay cautious.

Warsh was viewed by some observers as a surprisingly hawkish pick for the Fed by Trump, having often highlighted the risk posed to the inflation outlook by lower interest rates. But the president will likely still expect the incoming Fed chair to slash rates, potentially complicating the outlook for the Bank of Canada.

The good news for Canada: Warsh could find the task of dramatically cutting rates much easier said than done.

Why the new Fed chair may not be able to cut rates right away

Speaking to Canadian Mortgage Professional last week before Trump announced Warsh as his pick, Bank of Montreal (BMO) chief economist Doug Porter (pictured below) noted financial markets were taking a calm approach to the impending decision – potentially because a Fed chair can’t simply snap their fingers and lower rates.

“What I find interesting is that financial markets, which know darn well what’s going on here, are really not pricing in anything unusual for the rest of the year,” he said. “In the US financial markets, they’ve got just a little bit less than two rate cuts built into the market forecast through the rest of this year, with most of it starting around the June meeting and then another one in the second half of the year at some point.

“That’s not exactly a radical forecast. So despite all the noise around the Fed, the market’s still pretty comfortable that nothing really unusual is going to transpire for US interest rates this year, because I think the view is that the governance structures there will not allow a new Fed chair to just rule the roost and do whatever they want.”

The Fed chair is just one of 12 decisionmakers on the Federal Open Market Committee (FOMC), which votes on rate policy at eight scheduled meetings each year.

Two FOMC members voted for a rate cut in last week’s decision – but 10 favoured a hold, meaning supporters of a 25-basis-point reduction were comfortably outnumbered.

“There are 12 voters on the FOMC. And precious few of them turn over in any given year,” Porter said. “So even though there’s a lot of noise around the Fed, the market’s view – and I think, most forecasters’ view – is not a lot is really going to happen in terms of what really goes on with US interest rates.”

Other US-Canada challenges lie ahead for BoC

While that means the Bank of Canada may be able to breathe a sigh of relief for now on the Fed’s potential impact on its own rate policy, plenty of other aspects of the US-Canada relationship continue to present challenges for the year ahead.

There’s no sign of an end to the trade tensions that have rumbled since Trump launched his wave of global tariffs last year – and the Canada-United States-Mexico Agreement (CUSMA) is also up for review in July, sparking the prospect of difficult and complex negotiations.

Bank of Canada governor Tiff Macklem suggested those discussions could complicate the economic outlook for the year ahead, although Porter didn’t detect any panic from the central bank.

“I actually have the sense they’re quietly optimistic on that front, probably more so than I am,” he said. “I’m personally quite concerned about them actually being able to reach a deal this year. But I would love to be surprised.

“I think they know these are not going to be easy negotiations. Canada is probably going to have to give way on something. It’s just a matter of where and by how much.”

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Why mortgage renewals in 2026 might not be the crisis once feared

After seeing the first wave of pandemic-era mortgages come up for renewal last year, Canada is facing another renewal surge in 2026 as five-year mortgages terms draw to a close.

A dramatic spike in interest rates in 2022 and 2023 – when the Bank of Canada began hiking aggressively to tackle an inflation crisis – heightened fears that those COVID-era homebuyers, who took advantage of rock-bottom rates in 2020-21, could face sharp pain at renewal time.

Experts even flagged the risk that renewal wave could pose to the Canadian economy. The International Monetary Fund (IMF) described mortgage renewals, along with soaring household debt and cyber and pension oversight shortcomings, among the biggest threats to Canada’s financial system last year.

But some of the alarm surrounding mortgage renewals has eased thanks in part to a flurry of rate cuts by the Bank of Canada in 2024 and 2025, more than halving its benchmark rate and offering some much-needed relief to Canadian borrowers.

Between July 2023 and the start of June 2024, that policy rate – which leads variable mortgage rates and home equity lines of credit (HELOCs) in Canada – hovered at 5%, its highest level for 22 years.

A rate hold this week continued what many observers expect to be a prolonged pause for the central bank. But it cut rates nine times last year and in 2024, meaning many borrowers whose mortgage is up for renewal face a much less severe rate environment than at the height of the BoC’s inflation war.

Last September, Bank of Montreal (BMO) senior economist Robert Kavcic said those cuts meant rate shock would prove “meaningful but manageable” in 2026 for most borrowers, easing further by the middle of 2027.

And TD economist Maria Solovieva also views a better outlook for borrowers than before. “It’s a bit like that ankle injury you got in a dance class or on the field as a teenager,” she wrote last summer.

“It didn’t hurt too much at the time, but years later it still keeps you from sprinting. In economic terms, most mortgage borrowers will manage, but with less financial flexibility.”

Broker sees little to fear in 2026 renewal wave

So far, mortgage brokers – even in Canada’s priciest markets – haven’t reported a jump in renewal pain at the beginning of 2026.

Taz Zaide (pictured top), a Toronto-based broker with 6ix Mortgage Group, told Canadian Mortgage Professional his clients had proven largely resilient when renewal time came around.

About 60% of his company’s business has been renewal-focused since the beginning of the year, he said, with few if any nightmare stories among borrowers.

“All the clients that we’ve had who’ve been up for renewal have basically just been fine with qualification,” he said. “They fit within the guidelines. There’s been no issues on that end.

“Luckily, people coming up for renewal are not cash-strapped or in debt, at least from the portfolio of clients that we have/ They’ve been able to manage and now they’re just renewing regularly without needing to consolidate any money.”

Variable borrowers see further relief from recent years

Variable rate uptake skyrocketed at the onset of the COVID-19 pandemic after the Bank’s decision to slash rates, with their popularity showing no sign of slowing amid reassurances by Bank governor Tiff Macklem that borrowing costs “are going to remain very low for a very long time.”  

Borrowers on variable rates with non-fixed payments saw plenty of mortgage turbulence when the Bank suddenly began hiking rates in 2022. But while that shift caused acute pain, it also means those borrowers are actually seeing relief at renewal time with rates having since dipped.

“A lot of people took variable in 2021, back when the rates were 1.5% or so,” Zaide said. “Maybe 70% of people were getting pushed into variable. And then obviously in 2022 and 2023, variable rates rose dramatically.

“These guys were sitting at 5%, 5.5%. Now they’re coming back down to 3% so they don’t really have an issue with affordability, which is my hypothesis as to why it’s been kind of fine at renewal time The majority of people have already seen the worst of it when their rates jumped up to 5%, so now this is kind of a blessing for them to be able to lock into the threes.”

CMP

We hope you are finding our Blog informative and enjoyable to read while keeping you up to date with the ever changing real estate market. 

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