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Interest Rate Announcement: Bank of Canada Holds as Growth Resumes

Canadian Economics

By: Walter Bolduc

    

The Bank of Canada held the overnight rate at 2.25 per cent, the Bank Rate at 2.50 per cent, and the deposit rate at 2.20 per cent, the sixth consecutive hold since the easing cycle ended in October 2025. 

  • The Bank’s July projection is conditional on oil and gasoline prices easing from here. Prices sit below their April peak, though the Middle East is unsettled and the path for global inflation turns on how the conflict develops. 
  • Growth in the U.S. is running near 2.5 per cent on strong consumption and heavy AI investment, China’s growth is held up by robust exports, and growth in the Euro area is being restrained by high energy costs. 
  • The Bank projects global GDP growth to slow to 2.75 per cent in 2026 as the conflict weighs on activity, then recover to roughly 3.25 per cent in 2027 and 2028. 
  • Borrowing and market conditions in Canada have loosened since April and equity markets worldwide have rallied. U.S. bond yields have climbed while Canadian yields have remained fairly steady, weakening the Canadian dollar. 
  • Canadian GDP was uneven over the past year as new tariffs, elevated uncertainty, and slower population growth weighed on the economy. Signals point to growth resuming in the second quarter at an estimated 2.5 per cent, largely as earlier one-off disruptions unwound. The Bank noted that the recovery is also broadening across the economy. 
  • The unemployment rate was 6.5 per cent in June and has moved within a 6.5 to 7.0 per cent band since the end of 2024. Hiring remains subdued, consistent with an economy still running below its potential. 
  • Consumer spending is holding up and housing activity, while weak, appears to be levelling off. Export growth has resumed, though on a lower path than before tariffs, and business investment will pick up modestly with near-term support from the oil and gas sector. 
  • The Canada–United States–Mexico Agreement now falls under annual review. However, more firms are saying they have found ways to operate despite it. 
  • The Bank projects the Canadian economy to grow by 0.7 per cent in 2026, 1.8 per cent in 2027, and 1.8 per cent in 2028. 
  • CPI inflation reached 3.2 per cent in May, driven mainly by higher gasoline prices tied to the war. Stripping out gasoline, inflation was 2.2 per cent, and core measures have stayed close to 2 per cent. 
  • War-related costs are still passing through to some consumer prices, though economic slack is pushing down other prices and offsetting the effect. The Bank expects inflation to stay elevated in June before easing gradually and returning to roughly 2 per cent in early 2027. 
  • Governing Council reads the rate as where it needs to be to carry the recovery forward and bring inflation to target. Uncertainty is still high, and the Council will move if the outlook shifts. 

Key insights 

The cut to 2026 growth is backward-looking. The Bank lowered its growth forecast for this year while raising the projections for both 2027 and 2028. The reduction traces back to the first quarter, when the economy contracted against a Bank forecast of growth near 1.5 per cent. The second quarter is now running well above what the April projection assumed. A calendar-year figure depends heavily on the level of activity the year opens with, so a weak first quarter pulls the average down even when later quarters beat expectations. 

Economic slack is offsetting the influence of higher energy costs on consumer prices. By the Bank’s account, war-related costs have moved past the pump into other consumer prices, where weak demand is holding them down. The softness behind 0.7 per cent real GDP growth is therefore the reason core inflation sits near target. The Bank expects both to unwind on a similar schedule, with energy pressures fading as the recovery gradually absorbs the slack that now contains them. The risk lies in the timing, since oil prices that stay high while demand recovers would leave the cost pressure in place after the restraint has gone. 

Both risks we identified from June’s announcement have materialized. The Middle East conflict and U.S. trade policy were the threats we tied to a steady policy rate. The United States declined to extend CUSMA on July 1, and oil prices fell back to pre-war levels before climbing again. Neither moved the Bank, which held the rate, described the annual reviews as something firms are managing, and left its guidance intact. We continue to expect the rate to remain at 2.25 per cent for the rest of the year. The September decision comes without a Monetary Policy Report and will rest on two CPI readings, one jobs report, and second-quarter GDP, none of which should move the rate unless oil leaves the Bank’s assumed path.

For our full projection of the policy rate path and the Canadian economy, please visit Signal49 Research’s Canadian Outlook.

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