The Bank of Canada left its overnight rate unchanged at 2.25%, extending its pause for a sixth consecutive meeting, but the accompanying statement struck a more constructive tone on the domestic economy. While policymakers continued to emphasize uncertainty stemming from the Middle East conflict and US trade policy, they also acknowledged that Canada’s recovery is becoming more broadly based. Combined with a modestly upgraded near-term growth outlook, the message suggests the Bank sees current policy as sufficiently restrictive while remaining alert to renewed inflation risks from higher energy prices.
The Bank noted that financial conditions have eased since April and pointed to clearer signs that economic growth has resumed in the second quarter. Consumer spending remains solid, housing activity appears to be stabilizing, export growth has resumed, and business investment is expected to strengthen, supported in part by the oil and gas sector. Importantly, policymakers said “sources of economic growth appear to be broadening,” indicating the recovery is becoming less reliant on temporary factors.
The updated Monetary Policy Report estimates annualized GDP growth of 2.5% in the second quarter, stronger than projected in April, although the Bank still expects average growth of just 0.7% for 2026 before accelerating to 1.8% in both 2027 and 2028 as excess capacity is gradually absorbed.
Inflation remains the key challenge. The Bank expects CPI to stay elevated in the near term following the rise to 3.2% in May, largely reflecting higher gasoline prices linked to the Middle East conflict. However, excluding gasoline, inflation was 2.2% and measures of core inflation remained close to target.
Policymakers continue to believe inflation will gradually return to around 2% in early 2027, provided oil prices stabilize. That assumption has already become more uncertain as Brent crude has climbed back above $85 following renewed US-Iran hostilities, meaning the Bank’s updated projections face an immediate test.
Bank of Canada MPR Projection Summary
| Item | 2026 | 2027 | 2028 |
|---|---|---|---|
| GDP Growth | 0.7% (1.2%) | 1.8% (1.6%) | 1.8% (1.7%) |
| CPI Inflation | 2.5% (2.3%) | 2.0% (2.1%) | 2.1% (2.0%) |
Market Takeaways
- 2026 GDP was revised down to 0.7% from 1.2%, reflecting the earlier drag from tariffs and uncertainty.
- 2027 and 2028 GDP forecasts were upgraded to 1.8%, signalling greater confidence in a sustained recovery.
- 2026 CPI was revised up to 2.5% from 2.3%, largely due to higher energy prices.
- Inflation is still projected to return close to target over the medium term, indicating the BoC continues to view the latest oil shock as temporary rather than persistent.
- Domestic demand remains the primary engine of growth, while exports recover and business investment gradually improves.
