Today, the Bank of Canada once again held the policy rate at 2.25%, the level it has held since October 2025. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary.
According to the Bank’s policy statement, “The continuing conflict in the Middle East is keeping energy prices high. New US tariffs and Canadian countermeasures have also been announced following the breakdown of trade talks between Canada and the United States. Both situations remain fluid.”
Overall, the global economy has shown resilience in the face of geopolitical headwinds. With still-high oil prices and elevated margins for refined energy products, inflation remains high in most countries.
Financial conditions have tightened since July. Long-term bond yields have moved up globally, including in Canada. The Canadian dollar has appreciated slightly on US-dollar weakness.
The Canadian economy strengthened considerably in Q2, with growth of 3.3%, while the Q1 figure was revised up to 0.3% from an initial reading of -0.1%. While some of the recent strength reflected temporary factors, the pick-up in activity was broad-based. Consumption showed solid gains. After several weak quarters, housing activity rebounded. Exports and business investment were up sharply. Labour market conditions have improved in recent months, with the unemployment rate edging down to 6.4% in July. Still, demand for labour remains subdued, and indicators point to continued excess supply in the economy.
Overall, recent data reaffirm the Governing Council’s view of a broadening recovery in Canada’s economy. However, uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery.
CPI inflation has been hovering around 3% in recent months, mainly because of persistently higher gasoline prices. So far, there has been little evidence of higher energy prices spreading to other components of inflation: excluding gasoline, inflation was 2.2%, and core inflation measures remained close to 2% in July. However, with the Middle East conflict still ongoing and little progress in reopening the Strait of Hormuz, upside risks to the Bank’s inflation forecast have increased. The longer that high oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services. New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time.
“Economic growth in Canada has picked up after stalling over the past year. That puts us on a stronger footing as we face new challenges,” Macklem said in the prepared text of opening remarks for his press conference. “But uncertainty about the sustainability of the rebound has increased with new US trade actions.”
With the economy and inflation evolving broadly as forecast in the July MPR, Governing Council agreed to leave the policy rate unchanged. However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain. Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed. The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.
Bottom Line
The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty and a record oil price shock. PM Carney is also working to diversify Canada’s trade away from the US, a strategy that has been remarkably successful so far. Canadian export diversification is gaining momentum. In addition, goods imports are also shifting away from the US to the rest of the world.
We maintain our view that the Bank of Canada will keep rates steady this year. If inflation broadens and accelerates, rate hikes are possible, but that is not our baseline forecast. The Bank of Canada will be reluctant to tighten into housing market weakness. While housing activity strengthened since May, momentum is muted, and affordability improvements are likely to taper off in the coming months.
The Federal Open Market Committee meeting is scheduled for September 15-16. Based on comments from Fed Chair Kevin Wash at the annual Jackson Hole Fed confab, a rate hike by the Fed is likely. Traders now predict a 68% chance of a fed funds rate hike of 25 bps.