Bank of Canada holds interest rate at 2.25% for the sixth time amid economic recovery and global risks

Bank of Canada kept the key interest rate unchanged at 2.25% for the sixth consecutive time, in a decision reflecting the central bank’s attempt to support economic recovery without easing up on inflationary pressures caused by rising energy prices and geopolitical tensions.

The decision included fixing the bank rate at 2.5% and the deposit rate at 2.20%, with the Board confirming that the current interest rate level remains appropriate to support the economy and gradually bring inflation back to the target set at 2%.

The bank said the Canadian economy, which suffered weakness and volatility during the past period, has begun to show clearer signs of improvement, although the outlook remains surrounded by a high degree of uncertainty due to the war in the Middle East and US trade policies.

It pointed out that the rise in oil prices resulting from the conflict has weakened the global economic outlook and raised inflation, while large investments in artificial intelligence continued to support economic activity in the United States and an increasing number of countries.

Bank of Canada expects global economic growth to slow to 2.75% during 2026, before rising to about 3.25% in 2027 and 2028.

The US economy continues to grow at a rate close to 2.5%, supported by strong consumer spending and the investment boom in artificial intelligence, while the Chinese economy maintains solid expansion thanks to strong exports.

As for the Eurozone, it was affected by rising energy costs, but the bank expects its economic activity to improve during the second half of the year if energy prices decline as expected.

On the domestic front, the bank said Canadian growth faltered last year as businesses and markets adapted to new tariffs, slower population growth, and ongoing trade uncertainty.

Despite the labor market remaining relatively weak, with an unemployment rate of 6.5% recorded in June, indicators confirm the economy resumed growth during the second quarter at an estimated annual rate of 2.5%.

The bank explained that part of this recovery reflects the disappearance of temporary factors that were weighing on activity, but it noted that sources of growth have become more diversified.

Consumer spending remained resilient, while the housing market began to show signs of stabilization after a period of weakness, and exports resumed growth, with continued improvement expected, albeit on a path below pre-trade tension levels.

The bank also expects a gradual increase in business investments, supported in the short term by the oil and gas sector, alongside government spending contributing to boosting economic activity.

After expected growth not exceeding 0.7% in 2026 as a whole, the bank forecasts Canadian economic expansion of 1.8% in both 2027 and 2028, allowing for the gradual absorption of excess capacity.

Inflation rises due to gasoline

The annual inflation rate rose to 3.2% in May, mainly driven by the increase in gasoline prices linked to the war in the Middle East.

However, inflation excluding gasoline stood at 2.2%, while core inflation measures remained close to Bank of Canada’s target of 2%, indicating that price pressures have not yet spread widely within the economy.

The bank expects overall inflation to remain high in the June reading, before gradually declining over the coming months and returning to around 2% in early 2027.

However, this path remains linked to developments in oil and gasoline prices, and whether energy and transportation costs will spread to a broader range of goods and services.

The bank noted that short-term inflation expectations are quickly affected by gasoline price movements, while long-term expectations remain stable and close to its target.

Canadian dollar declines

The rise in US bond yields, compared to their relative stability in Canada, contributed to widening the gap between the two countries and putting pressure on the Canadian dollar’s value.

Currency weakness may increase the cost of imported goods, but at the same time provides some support to Canadian exporters in foreign markets.

The Bank of Canada’s Board confirmed that the current interest rate provides an appropriate level of support to the economy, while keeping inflation under watch amid ongoing external shocks.

The decision means borrowing costs directly linked to the key interest rate remain stable, including variable-rate mortgages and lines of credit, without guaranteeing a decline in fixed mortgage rates, which are also affected by bond yields.

The bank emphasized that it is ready to adjust its monetary policy if necessary, whether to address a sudden economic weakness or to prevent rising energy prices from turning into broader and more persistent inflation.

The next decision on the interest rate is scheduled for September 2, 2026, while the bank will publish the next Monetary Policy Report on October 28.