Bank of Canada holds rates at 2.25% as outlook improves

By Erik Hertzberg

(Bloomberg) — The Bank of Canada held interest rates steady for a sixth consecutive meeting as policymakers see the economy rebounding and oil price-driven inflation fading.

Officials led by Governor Tiff Macklem kept the policy rate at 2.25% on Wednesday, matching expectations of economists in a Bloomberg survey and traders in overnight swap markets.

“After a year of weakness, Canada’s economy is showing signs of improvement,” the bank said in its monetary policy report. “Growth is expected to pick up, and inflation eases gradually from its recent peak. Uncertainty is still high.”

The bank said in its rate statement that current borrowing cost levels remain appropriate to sustain the economic recovery and bring inflation back to the 2% target. “Governing Council will continue to assess the strength of the Canadian economy and the outlook for inflation, and is prepared to adjust monetary policy as needed,” it said.

In the past two rate decisions, Macklem had warned that “consecutive” rate hikes might be needed if the Middle East conflict continues and higher energy prices feed into broader inflation. He dropped this language in Wednesday’s opening remarks, along with a warning that there may be a need to cut if the U.S. imposes major new trade restrictions.

The loonie traded steadily against the U.S. dollar after the decision, little changed on the day around the C$1.4057 mark as of 10:23 a.m. in Ottawa. Canadian bonds extended small gains across the curve, with the two-year yield down about four basis points to 2.83%. Swaps traders continue to price some 20 basis points of tightening from the bank by December.

In the monetary policy report, the bank said it sees growth rising by 2.5% annualized in the second quarter and 1.5% in the third. And while weakness at the start of the year prompted officials to slash their 2026 growth forecast to 0.7%, policymakers boosted their forecasts for 2027 and 2028 to 1.8% each.

Headline inflation is seen averaging 2.5% in 2026, from 2.3% previously, and is forecast to return to the bank’s 2% target by early next year. Policymakers listed “higher oil prices, elevated gasoline refinery margins and a weaker Canadian dollar” as reasons for near-term strength in price pressures.

The bank’s forecasts show core inflation remaining subdued too, and officials pointed to a narrowing breadth of underlying price pressures as evidence that higher oil costs aren’t spilling over into the prices of other goods and services.

“Despite some volatility, recent data suggest that the economy is evolving broadly in line with the outlook in the April report,” the bank said, referencing its last batch of forecasts.

Combined, policymakers struck a positive tone on the economy while reinforcing their belief that inflationary pressures from higher energy prices will eventually fade.

At the same time, the uncertainty posed by tariffs and the war in the Middle East continue to add to risks, supporting the bank’s decision to hold rates steady.

Inflation risks

The bank said a main upside risk to inflation is potential price pressures from businesses passing on higher input costs to consumers.

It also raised concerns about the possibility that its estimates of productivity could be “weaker than assumed,” which would imply a smaller output gap and more inflationary pressure.

The bank listed a potential tightening of global financial conditions and weaker-than-expected recovery in domestic economic growth as downside risks to the inflation outlook.

They assume Brent to fall to $70 a barrel by the end of 2027, based on the July 9 futures curve and slightly lower than their April forecast. Policymakers also boosted their outlook for exports, in part due to higher “energy-related activity.”

Macklem and Senior Deputy Governor Carolyn Rogers will speak to reporters at 10:45 a.m. Ottawa time.

The bank didn’t provide its interest rate decision on an embargoed basis to media outlets because of a planned protest in support of striking security guards.

–With assistance from Mario Baker Ramirez and Nojoud Al Mallees.

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