Sixth Straight Hold From the Central Bank
The Bank of Canada kept its benchmark interest rate unchanged at 2.25% on Wednesday, marking its sixth consecutive hold. The decision was widely expected by economists, but the central bank’s tone was somewhat more constructive on the economy.
Macklem Sees Progress Despite Uncertainty
Governor Tiff Macklem said Canada’s economy is still operating under elevated uncertainty, but officials are becoming more confident that the country is gradually working through the pressures that have weighed on growth.
Current Rate Seen as Appropriate
Macklem said the governing council remains prepared to adjust policy if conditions change. For now, however, officials believe the current rate is suitable to help bring inflation back to 2% while also supporting an economic recovery.
Energy Markets Remain the Key Risk
The central bank made clear that its outlook depends heavily on global energy prices. Macklem warned that if gasoline prices rise again and remain elevated, further rate hikes could still be considered to prevent inflation from becoming more persistent.
Rate Hikes Are Not the Base Case
Macklem stressed that renewed tightening is not the central bank’s main expectation. He said the Bank of Canada’s best judgment is that the current policy setting “looks appropriate” given the latest economic and inflation data.
Economy Shows Signs of Improvement
Recent data heading into the decision suggested that Canada’s labour market and broader economy were improving after a difficult start to the year. The early-year contraction surprised the central bank, which had expected annualized growth of 1.5% in both the first and second quarters.
Growth Forecast Updated
In its updated monetary policy report, the Bank of Canada said it now expects growth of 2.5% over the last three months. Macklem noted that the economy has struggled over the past year because of tariffs, uncertainty and slower population growth.
Consumers and Housing Offer Support
The governor said consumer resilience and a stabilizing housing market are helping the economy adjust. The central bank also sees growing momentum in exports, including shipments to the United States, which could support business investment in the months ahead.
Companies Are Adapting
Macklem said businesses are finding ways to operate in a more complicated environment. He noted that companies are working with clients, reconfiguring supply chains and continuing to move forward despite uncertainty.
TD Economist Sees Modest Change
Leslie Preston, senior economist at TD Bank, said the Bank of Canada’s overall economic outlook did not change dramatically, even after the large miss in first-quarter growth. She said the central bank expressed slightly more confidence in signs of improvement.
Longer-Term GDP Outlook Edges Higher
The Bank of Canada now expects real gross domestic product to grow 1.8% in both 2027 and 2028. That is slightly above its April forecast, though Preston said the figures still do not suggest an economy operating at full strength.
Inflation Rose to 3.2% in May
Inflation reached 3.2% in May after the Iran war triggered a global energy shock and sent gasoline prices higher during the spring. So far, the data suggest that higher fuel costs have not spread broadly across the rest of the consumer basket.
Oil Prices Add New Pressure
Renewed fighting between the United States and Iran is again pushing global oil prices higher. The central bank said gasoline costs remain volatile and highly dependent on developments in the Middle East.
Bank Watching Spillover Risks
Macklem said the Bank of Canada has been looking past the direct inflation impact of higher oil prices. However, he warned that the longer energy costs remain elevated, the greater the risk that they spill into other goods and services.
Persistent Inflation Remains the Line
The governor repeated that the central bank will not allow higher oil prices to turn into persistent inflation. That warning leaves the door open to future action if energy-driven price pressures become more embedded.
Hormuz Disruptions Under Review
To assess the longer-term impact of the Middle East conflict, the Bank of Canada is tracking how long supply chain bottlenecks linked to disruptions in the Strait of Hormuz continue to affect shipping volumes.
Food and Fuel Pressures Could Last
The central bank expects knock-on effects from the war to keep inflation elevated, especially at gas stations and grocery stores, into early 2027. Food inflation is expected to remain sticky in the near term because of higher fuel and fertilizer costs.
Weak Demand May Limit Price Increases
The Bank of Canada said softer demand in the economy could limit how much businesses pass higher costs on to consumers. At the same time, it warned that a weaker Canadian dollar could raise the price of imported goods.
CIBC Expects Rates to Stay on Hold
CIBC senior economist Katherine Judge said the central bank’s updated forecasts show there is still plenty of slack in the economy. She said that softer backdrop supports CIBC’s view that the Bank of Canada will keep rates unchanged for the rest of 2026.
Markets Expect Another Hold in September
Preston also expects the central bank to leave its key rate steady for the foreseeable future, arguing that softer growth is helping contain price pressures. Financial markets overwhelmingly expect another hold at the September 2 announcement, according to LSEG Data & Analytics.
Strike Changes Press Briefing Plans
An ongoing strike by security officers at the Bank of Canada’s head office in Ottawa disrupted the usual briefing process on Wednesday. Instead of the typical in-person briefing before the rate decision, officials held a virtual press conference with Macklem.
A Cautious Hold With Energy in Focus
The Bank of Canada’s latest decision reflects cautious optimism about the economy, but also a clear warning that the Middle East conflict and energy prices remain major risks. For now, policymakers believe the current rate is appropriate, while leaving themselves room to respond if inflation pressures become more persistent.
