BoC Governor Tiff Macklem warned that the economic outlook remains uncertain after the central bank left its rate unchanged on Wednesday.Blair Gable/Reuters
The Bank of Canada held its benchmark interest rate steady on Wednesday against the backdrop of volatile energy markets and improving domestic data.
As widely expected, the central bank’s governing council opted to keep the policy rate at 2.25 per cent for the sixth consecutive time.
The bank has been on hold since October, through a period of stagnant economic growth in Canada and soaring global oil prices caused by the war between the United States and Iran and the closing of the Strait of Hormuz.
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Energy-related inflation risks have eased in recent months, as oil prices have declined from highs in April and May. And after a year of essentially no growth, the Canadian economy appears to be picking up heading into the summer.
Still, the bank warned that the economic outlook remains uncertain, and the path for inflation is heavily dependent on the conflict in the Middle East, which has heated up in recent days, causing another spike in benchmark oil prices.
Bank of Canada Governor Tiff Macklem said the current interest-rate level remains “appropriate” to manage both upside risks to inflation and downside risks to the economy, but that the bank is prepared to adjust monetary policy as needed.
“As inflation comes down, there is risk that it gets stuck above the 2 per cent target. If cost increases and their pass-through are larger than expected or the economy recovers faster than expected, inflationary pressures will increase,” Mr. Macklem said in a press conference after the rate announcement.
“On the other hand, there’s a risk that the second-quarter pickup in growth is not sustained. The recovery in exports could stall, which would likely weigh on business investment and hiring. A weaker economy would put more downward pressure on inflation,” he said.
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After falling to around US$72 in early July, the price of a barrel of Brent crude jumped back to around US$85 as the U.S. and Iran resumed military strikes. That’s well below the US$120 reached in April, but heading in the wrong direction.
Rising gasoline prices earlier this spring pushed Canada’s annual rate of consumer price index inflation to 3.2 per cent in May – the first time it’s been above the top end of the bank’s 1-per-cent to 3-per-cent control band since late 2023.
In its quarterly Monetary Policy Report, published alongside the rate announcement, the bank said it expects headline inflation to decline to around 2.5 per cent by August, then to move back to its 2-per-cent target by early 2027.
“This easing is based on the assumption that oil prices are around US$75 per barrel and gasoline refinery margins edge down. But the situation in the Middle East remains fluid and subject to flare‑ups, which could affect oil prices and inflation,” the bank said in the MPR.
Meanwhile, the bank expects economic growth in Canada to strengthen through the summer and second half of the year, on the assumption exports improve, business investment picks up and consumer and government spending remains robust.
Exports are getting a boost from high oil prices, and could be further buoyed by a weak Canadian dollar – which makes Canadian products more attractive to foreign buyers – and U.S. demand for the raw materials tied to the massive build-out of data centres for artificial intelligence, the bank said.
Business investment is expected to improve as energy companies take advantage of high oil prices and businesses become more comfortable operating in an uncertain trade environment defined by U.S. protectionism, the bank said.
“Overall, our growth outlook is similar to our April forecast, but the data we have received since April have increased our confidence that the economy is indeed working its way through this period of global upheaval,” Mr. Macklem said.
The bank lowered its estimate for 2026 GDP growth to 0.7 per cent from 1.2 per cent in the April MPR, as a result of the unexpected GDP contraction in the first quarter of the year. However, it increased its forward looking GDP projections.
It now expects GDP to grow 1.8 per cent in both 2027 and 2028, up from a previous projection of 1.6 per cent and 1.7 per cent respectively in the April MPR. The economy is expected to grow 2.5 per cent at an annualized rate in the second quarter.
The bank said that labour market conditions “continue to be soft but broadly stable.”
There are still plenty of risks surrounding this outlook. Slow population growth, tied to the federal government’s immigration restrictions, remains a drag on economic growth, and the housing market remains in a long-term slump.
“The overhang of unsold condominiums in Vancouver and Toronto, along with affordability issues, could mean that the recovery in housing activity is slower than expected,” the bank said in the MPR.
Likewise, U.S. trade policy is a significant risk. On July 1, the Trump administration decided not to extend the United States-Mexico-Canada agreement for another 16 years. That means the agreement moves into a period of annual reviews until 2036, while the threat of withdrawal or higher tariffs remains.
“The economy is adjusting to US tariffs, and the impact of trade‑related uncertainty is assumed to gradually fade,” the bank said. “However, the United States could announce further trade measures. Uncertainty could also persist for longer than assumed, weakening business investment and household spending.”