The Bank of Canada held its benchmark interest rate steady at 2.25 percent on Wednesday, maintaining the level for the sixth consecutive time amid an improving yet uncertain economic outlook. The central bank’s decision reflects cautious optimism about economic growth rebounding in the latter half of the year, alongside ongoing volatility in global oil markets.

Governor Tiff Macklem noted that after a year of stagnation, the Canadian economy appears to be gaining momentum. Consumer resilience and business adaptability are supporting growth despite trade challenges with the United States. Meanwhile, the easing of oil prices from their peaks in April and May has reduced the risk of inflation spurred by high gasoline costs. However, recent hostilities between the U.S. and Iran around the Strait of Hormuz have pushed Brent crude prices up by around US$10 to approximately US$85 per barrel, adding continued uncertainty to the energy market.

Macklem acknowledged this volatility poses risks to the inflation outlook. While the current interest rate is deemed appropriate, adjustments remain possible. Should oil prices rise sharply and remain elevated, the Bank of Canada has indicated that further rate increases could be necessary. Conversely, if the domestic economic rebound loses steam, rate cuts might be considered. The bank maintains that neither hikes nor cuts are the base-case scenario at present, but risks exist on both sides.

Inflation trends show some signs of easing from recent highs. The Consumer Price Index (CPI) reached 3.2 percent annually in May, surpassing the Bank’s target range of 1 to 3 percent for the first time since late 2023. However, core inflation measures, which exclude volatile items, remain close to the 2 percent target. While some companies have passed on costs related to geopolitical tensions, downward pressure from weaker demand for services has helped contain broader inflationary pressures. The Bank projects headline inflation will fall to about 2.5 percent by August and return to 2 percent by early 2027, assuming oil prices decrease to around US$75 per barrel and refinery margins narrow.

Economically, the Bank of Canada anticipates a modest rebound following two quarters of declining GDP, which had sparked debate over whether Canada had entered a recession. Export demand, supported by relatively high oil prices, a weaker Canadian dollar, and U.S. investment linked to data centres, is expected to bolster growth. Business investment is gaining traction, consumer and government spending remain solid, and the housing sector’s previously significant drag on growth is easing.

Despite these positive signs, risks persist. The Bank highlighted slow population growth partly due to federal immigration restrictions and uncertainties surrounding the housing market, particularly the oversupply of condominiums in major cities like Vancouver and Toronto, as potential constraints on the economic recovery. Furthermore, unresolved issues in U.S. trade policy add to the uncertainty. The lapse of the United States-Mexico-Canada Agreement’s extended term introduces annual reviews and the possibility of renewed tariffs or trade disputes, which could dampen business investment and consumer spending.

Market expectations currently anticipate the Bank of Canada will hold rates steady through the next two meetings, with a potential quarter-point increase late in the year. Most economists project the policy rate will remain unchanged until 2027, barring significant shifts in economic or geopolitical conditions. The bank’s revised projections see GDP growth of 0.7 percent for 2026, lowered from earlier forecasts due to a weak first quarter, but expect stronger growth of around 1.8 percent annually in 2027 and 2028. The evolving outlook underscores the balance the Bank seeks between supporting economic recovery and managing inflation amid ongoing external risks.