Bank of Canada maintains the policy rate at 2¼%
The Bank of Canada held its policy rate at 2.25% as inflation eases and growth improves, though risks from geopolitical tensions and trade policy remain.
The Bank of Canada maintained its overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%, citing signs of economic improvement. Growth is accelerating, and inflation is projected to decline gradually from recent highs. However, the Bank noted risks tied to the Middle East conflict and US trade policy, which have contributed to higher oil prices and volatile market conditions. The Governing Council stated the current policy rate remains appropriate to support recovery and return inflation to the 2% target, as outlined in the April Monetary Policy Report.
Global economic activity is uneven, with the US expanding at 2.5% due to strong consumption and AI investment, while China’s growth is driven by exports. The euro area faces headwinds from high energy prices but is expected to strengthen later in the year. The Bank projects global GDP growth will slow to 2.75% in 2026 before recovering to 3.25% in 2027 and 2028. Financial conditions in Canada have eased since April, though the Canadian dollar has depreciated due to rising US bond yields.
Canada’s GDP growth stalled in recent quarters amid tariffs, uncertainty, and slower population growth, with the unemployment rate holding at 6.5% in June. Labour market conditions remain soft, but signs of recovery are emerging, with second-quarter growth estimated at 2.5%. Consumer spending is solid, housing activity is stabilizing, and export growth has resumed. Business investment is expected to rise modestly, supported by the oil and gas sector, while government spending continues to bolster economic activity.
Inflation rose to 3.2% in May, primarily due to higher gasoline prices linked to the Middle East conflict. Excluding gasoline, inflation was 2.2%, and core measures remained near 2%. The Bank expects inflation to ease gradually, returning to around 2% by early 2027, though this depends on oil price trends. The Governing Council remains prepared to adjust policy as needed, given ongoing uncertainty. The next rate decision is scheduled for September 2, 2026, with the Monetary Policy Report to be released on October 28, 2026.