Bank of Canada sees economy running below potential, and that matters for risk assets

Canada’s central bank just confirmed what most economists suspected: the country’s economy is still running below its full capacity. The Bank of Canada estimates its output gap sits between -1.5% and -0.5%, with potential output growth projected at a modest 1.1% for 2026.

What the output gap actually tells us

The output gap measures the difference between what an economy actually produces and what it could produce at full capacity without triggering runaway inflation. A negative output gap means there’s slack in the system: factories aren’t running full tilt, workers are underemployed or sitting on the sidelines, and businesses have room to grow before bumping up against capacity constraints that push prices higher.

The Bank of Canada’s assessment places the gap between -1.5% and -0.5% for Q4 2025. The BoC held its overnight rate steady at its January 2026 meeting, and the persistent gap was flagged as a key reason why rate hikes remain off the table. As of July 2026, the persistent output gap continues to be highlighted as a significant factor constraining any potential rate hikes.

Why crypto traders should care about Canadian monetary policy

Low interest rates mean lower borrowing costs, cheaper capital, and more money flowing into speculative investments. The Bank of Canada is one of the G7 central banks, and its policy stance contributes to the broader global monetary environment. The persistent disinflationary pressure generated by the negative output gap gives the BoC cover to keep rates where they are.

The bigger picture for investors

The 1.1% potential output growth projection for 2026 suggests the BoC doesn’t expect a dramatic acceleration. Institutional allocators increasingly factor central bank policy paths into their crypto exposure decisions. A narrowing output gap would suggest the economy is heating up, potentially bringing rate hikes back into the conversation. A widening gap could prompt rate cuts.

Investors watching the Canadian dollar should note that prolonged accommodative policy tends to weaken a currency relative to peers with tighter monetary stances, which could push some domestic capital toward dollar-denominated assets, including Bitcoin and stablecoins, as a hedge against local currency depreciation.

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