Monetary Policy Report—January 2026
Global growth is expected to remain solid, supported by the boom in investment in artificial intelligence and by fiscal stimulus in several major economies.
Global growth is estimated to be about 3% over the projection horizon, similar to the October Report. However, the growth outlook is vulnerable to several uncertainties. These include the following:
- Trade adjustments stemming from elevated US tariffs and ongoing trade policy uncertainty are reshaping global trade flows, dampening demand and weighing on business investment.
- Artificial intelligence (AI)-related investment and equity market valuations have increased rapidly. The future strength of these investments and valuations and the impacts of AI on productivity and the labour market are uncertain.
- Geopolitical tensions are adding unpredictability. For example, supply chains and financial markets could be disrupted, and global commodity markets could become more volatile.
United States
Economic growth in the United States is forecast to remain solid due to ongoing strength in consumption, AI-related investment and fiscal stimulus. Tariffs have pushed up inflation, but this effect is expected to be temporary.
Economic activity remains strong but has slowed
Robust AI-related investment and solid consumption—supported by strong equity markets and lower policy interest rates—are bolstering growth (Chart 17). The federal government shutdown weighed on economic activity in the fourth quarter of 2025, but a full rebound is expected in the first quarter of 2026. US economic growth is expected to moderate to about 2.5% over the fourth quarter of 2025 and the first quarter of 2026, from roughly 4% over the second and third quarters of 2025.
US trade dynamics have been volatile. Imports fell in the second half of 2025, after purchases were pulled forward ahead of tariffs earlier in the year. The shift in US trade policy has reduced how much the United States is importing from Canada and China; meanwhile, most other countries have gained market share (Chart 18).
The US labour market has slowed despite the recent strength in economic growth. Employment and wage growth have slowed since mid-2025. Since September, the unemployment rate has remained relatively stable near 4.4% because both labour demand and labour supply have eased.
Growth in gross domestic product (GDP) is projected to be 2.6% in 2026. This growth will be reinforced by fiscal stimulus, an easing in monetary policy and continued strength in AI-related investment. In addition, strong productivity gains are expected to support growth in real incomes over the projection horizon. As these forces wane, growth is expected to ease to 2.1% in 2027.
US inflation is expected to ease
Inflation in the US personal consumption expenditures price index was 2.8% in November, partially reflecting increased tariffs. Inflation is expected to hover near 2¾% through the first half of 2026, amid continued upward pressure from tariffs that is partially offset by the effects of lower global oil prices. As the impacts of tariffs fade, inflation is projected to gradually decline, approaching the 2% target by the end of 2027. This easing is underpinned by a balanced labour market and modest growth in labour costs over the projection.
Euro area
The euro area is expected to maintain steady economic growth, averaging 1.3% over the projection horizon. Inflation is anticipated to remain close to the European Central Bank’s 2% target.
Growth in the second half of 2025 was supported by strong activity in the services sector, especially tourism and investment in digital services (Chart 19). Recent data suggest that this momentum will persist.
In contrast, the goods-producing sector is still adjusting to higher US tariffs and competition from China. Nevertheless, moderate and sustained GDP growth is expected over the projection horizon, supported by government spending on defence and infrastructure. The pace and scale of the fiscal expansion, along with heightened geopolitical tensions, remain sources of uncertainty.
China
China’s economic growth remained solid in 2025, supported by a shift in exports away from the United States toward other markets. Domestic demand softened in the second half of 2025 due to:
- waning fiscal support for consumers
- a government directive curbing inefficient investment
- a renewed decline in property sector activity
Domestic demand is expected to grow modestly over the projection horizon, held back by a shrinking labour force and ongoing weakness in the property sector. While export growth remains robust, it is expected to ease.
China’s trade surplus as a share of GDP is expected to continue its recent rise (Chart 20). This increasing reliance on exports leaves growth vulnerable to a slowdown, particularly if strong Chinese exports prompt other countries to put protectionist measures in place.