Bank of Canada Holds Rates Unchanged, Points to a Modest Rebound in Activity 

• The Bank of Canada (BoC) held its policy rate at 2.25%, in line with market expectations. The opening statement noted that “Canada’s economy is showing signs of improvement”.
• The Bank pointed to a modest rebound in activity following the weak start to the year saying that labour market conditions “have remained soft, reflecting ongoing economic slack”, while stronger exports, solid consumer spending, and a pickup in business investment are expected to lift second-quarter GDP growth to a “solid” 2.5% quarter-on-quarter (annualized).
• The updated Monetary Policy Report characterized Canada’s growth outlook as “broadly unchanged”. It revised down the near-term growth outlook due to the weak first quarter but expects activity to strengthen through the second half of 2026. Looking further ahead, the Bank projects that “excess capacity to be gradually absorbed”, supported by exports, government and consumer spending and a recovery in business investment.  At the same time, the MPR continued to emphasize elevated uncertainty surrounding the outlook.
• The Bank also noted that the near-term inflation remains elevated due to earlier increases in energy prices and judges that “higher gasoline prices adds roughly 1.4 percentage points (ppts) to inflation in the second quarter of 2026”.  In its outlook the Bank assumes some war-related costs pressures are passed through to consumers. These effects have a “peak impact of about 0.4 [ppts] on consumer price index inflation in the first quarter of 2027”. The Bank expects CPI to “ease gradually in the coming months, returning to around 2% in early 2027”. There continues to be limited evidence of broad-based pass-through into other prices, core inflation remains close to the 2% target, and “longer-term inflation expectations remain well anchored”.
• Finally, Governing Council reiterated that monetary policy remains well positioned to respond should the outlook materially change. While downside risks from ongoing U.S. trade uncertainty remain, the Bank continues to stand ready to “adjust monetary policy as needed”.

Key Implications

• There were no surprises in today’s decision – the Bank of Canada’s message remains one of patience. Compared with June, the Bank struck a modestly more optimistic tone on the economy. Economic activity has improved modestly following a weak first quarter, labour market conditions have been soft, and inflation pressures outside of energy remain well contained.
• If the repeated closures and reopenings of the Strait of Hormuz were not having such real economic consequences, they would rival the FIFA World Cup for drama. The latest blockade has pushed oil prices roughly 10% higher, placing some upside risk to the BoC’s oil price assumption underpinning their forecast.   With the economy still operating below capacity, and core inflation remaining close to target, we continue to expect the Bank of Canada to remain on hold through the balance of the year.