2026 Budget Update: Economic overview

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Economic overview

A comprehensive Economic Overview was prepared as part of the 2024 – 2027 multi-year budget. The information below focuses on what has changed since fall 2024, based on the most current information available while preparing the budget materials.  

Macroeconomic outlook update 

The Canadian economy has faced uncertainty amid geopolitical shifts, particularly changes in U.S. fiscal and trade policy and their cascading effects. This has affected several key areas including interest rates, inflation, and general economic activity, which are discussed separately below. This information is prepared at a point in time in a rapidly changing economy therefore the discussion is focused on the changes that have occurred to date rather than the expected economy in 2026.  

Interest rate environment 

The Bank of Canada’s overnight interest rate (policy rate) forms the basis for what the market will pay for short-term debt and investments. As of September 2025, the overnight rate is 2.50 per cent, a decrease of 1.75 per cent from September 2024. Further, this is a 2.50 per cent decrease compared to the previous 5.0 per cent high in October 2023. While further interest rate changes are possible, they are expected to occur gradually, reflecting a transition toward a more stable monetary environment that supports long-term planning as economic conditions continue to evolve.  

For the City, the policy rate has the largest direct impact on short-term investments and debt issuances. Lower rates reduce returns on High Interest Savings Accounts and new short-term GIC purchases, while also lowering borrowing costs for the short-term portion of new serial debenture issuances. For long-term debt, the impact is less direct, as borrowing costs are driven by government bond yields rather than the policy rate. 

Government bond yields are closely monitored throughout the year because of the effect on the cost of borrowing on new City debenture issuances. The yield curve of the Government of Canada bonds is steeper than a year ago, which means the cost of borrowing on debentures maturing over the next five years is lower, but higher on maturities greater than five years. As noted in the debt strategy, future debt requirements assume a 20-year repayment term, and future debenture issuances may be for 10 or 20 years, depending on what is most advantageous in the market at the time. Any 10-year debenture issuances would require refinancing of the residual balance in 10-years’ time, which introduces both risk and opportunity depending on the rates available at the time of refinancing. In future debenture issuances, staff will seek to balance opportunities for lower borrowing costs that may be possible through 10-year issuances with a refinancing requirement, and 20-year issuances which bring interest rate certainty. Bond yields are highly volatile and the City remains flexible on the timing of debenture issuances to minimize the cost of borrowing while maximizing flexibility in capital planning. 

Inflationary outlook 

The Bank of Canada has a target of 2 per cent inflation, the mid-point of its target range of 1 – 3 per cent. The City tracks two key inflationary indicators: Consumer Price Index (CPI), and Non-Residential Building Construction Price Index (NRBCPI). 

Consumer Price Index (CPI) 

The latest inflationary data at time of writing was released in September 2025. At that time, inflation was 1.9 per cent for August 2025, comparable to inflation from last year at 2 per cent in August 2024. The Bank of Canada forecasts inflation to remain around 2 per cent in 2026 and 2027, suggesting a more predictable cost environment for the City. However, sector-specific pressures could still create cost increases with the ongoing tariff policies and supply chain volatility. 

Non-Residential Building Construction Price Index (NRBCPI) 

NRBCPI is reported quarterly, and the latest published data was 4.2 per cent, which reflected the increase from second quarter of 2024 to second quarter of 2025 (down from 6.5 per cent in the previous year). This decrease suggests that escalations to construction costs are slowing but remain well above CPI of 1.7 per cent. For the City, this means capital projects continue to face cost pressures despite inflation stabilizing, and that a larger portion of annual budgeted increases in capital funding are dedicated to maintaining versus gaining ground toward closing the infrastructure gap. Higher construction costs also impact housing development and affordability as noted below. 

Tariff related cost pressures 

At the time of writing, Canada is currently exposed to an estimated average tariff rate of 5 per cent, with certain sector-specific tariffs reaching up to 25 per cent when falling outside the Canada-United States-Mexico Agreement (CUSMA). These tariffs have contributed to significant price increases in some areas, most notably vehicle repairs and maintenance. The overall tariff related impact is difficult to isolate, as the City typically purchases finished goods where tariff costs are embedded in vendor pricing throughout the supply chain. Staff are carefully monitoring trade policies and looking for alternative suppliers for automotive parts with significant price increases as an effort to mitigate impacts and maintain cost efficiencies. 

Economic Activity 

As outlined by S&P Global Ratings in the 2025 Credit Rating update, “Guelph benefits from a strong and diverse economic base” and expects the local economy to “continue to perform in line with Canada’s [economy]”. Canada’s GDP in the second quarter of 2025 declined by 1.6 per cent due to a significant decrease in exports and business investment. Given concerns around a weakening Canadian economy, the Bank of Canada lowered the overnight lending rate in September 2025.  

In Guelph, residential and non-residential construction activity slowed in 2024 and the first half of 2025. The impact on the City has been realized through lower-than-expected Development Charge (DC) collections, building permit revenue and assessment growth. These impacts are discussed in greater detail throughout the budget web materials. With a decrease in the overnight rate in September 2025, construction activity could improve in 2026, however, uncertainty remains as GDP projections indicate slow growth.