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Interest Rate Announcement: Bank of Canada Holds at 2.25 Per Cent

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 fifth consecutive hold since the easing cycle ended in October 2025.

  • Now four months in, the war in the Middle East has raised energy costs and disrupted global supply chains, slowing world growth while pushing prices higher. New tariff proposals from the U.S. administration are keeping trade policy uncertainty elevated.
  • Growth in the U.S. is being driven by consumer spending and AI investment, China’s growth is being propped up by exports, and growth in the Euro area is being held back by higher energy costs.
  • Financial conditions in Canada have eased since April. Stock markets have climbed, bond yields continue to swing, and the Canadian dollar has fallen against the U.S. dollar and other major currencies.
  • Canada’s economy slipped by 0.1 per cent in the first quarter, a softer result than the Bank’s April projection anticipated. Consumer spending rose by 1.4 per cent. However, government spending fell unexpectedly, housing activity weakened, and businesses held off on investment amid trade uncertainty.
  • Exports fell in the quarter while imports jumped as firms restocked inventories. The Bank expects growth to pick up again in the second quarter, though excess supply will likely persist.
  • The unemployment rate has been moving within a band of 6.5 to 7 per cent and stood at 6.6 per cent in May. Hiring picked up during the month, but the job count has barely moved since January once monthly swings are set aside.
  • CPI inflation climbed to 2.8 per cent in April. Higher oil prices added to the increase, as did the comparison with April 2025 when the removal of the consumer carbon tax briefly lowered prices. Core measures have settled around 2 per cent, and higher energy costs have yet to feed meaningfully into other consumer prices.
  • Oil is trading at about US$10 per barrel above the level the Bank assumed in April, which will keep headline inflation near 3 per cent over the coming months before a gradual return toward target. Food prices are still rising quickly, though the pace is slowing, and shelter cost growth continues to cool.
  • Governing Council is treating the war’s effect on headline inflation as temporary. However, it has made clear it will act if higher energy costs start spreading into broader, lasting price pressures.
  • The next interest rate decision is July 15, 2026, accompanied by the next Monetary Policy Report.

Key Insights

First-quarter weakness was concentrated outside the household sector. Consumer spending was the only part of domestic demand that grew in the first quarter. Government spending fell, housing activity declined, and businesses kept delaying investment. The swings in exports, imports, and inventories largely reflect firms rebuilding stocks rather than a shift in demand. For now, household spending is the main support for domestic demand, and higher energy prices will leave households with less to spend elsewhere. If that support fades before investment returns, the economy’s excess supply will widen further. We expect household spending to keep growing at a modest pace this year, enough to hold activity together until trade conditions settle.

Core inflation is giving the Bank room to stay patient. In April, the Bank said it would treat energy-driven inflation as temporary if core inflation stayed near 2 per cent, price increases remained limited to a small share of the basket, and inflation expectations held steady. The first two conditions are being met. Core measures are near target and there is little sign of energy costs spreading into other prices. However, headline inflation near 3 per cent will test expectations over the coming months. The next two CPI readings and the summer consumer expectations survey will carry more weight than usual heading into the July decision.

The case for moving rates in either direction remains weak. A cut would need evidence that weak growth is pulling inflation below target, and a hike would need signs that energy costs are feeding into wages and other prices. Neither is in the data. Financial conditions have also eased on their own since April, with a weaker dollar and stronger equity markets providing some of the support a rate cut would otherwise deliver. We expect the Bank to hold the overnight rate at 2.25 per cent for the rest of the year, with the main risks coming from the Middle East conflict and U.S. trade policy rather than from the domestic economy.

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

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