Bank of Canada holds key rate steady at 2.25%, predicts economic rebound

The Bank of Canada held its benchmark interest rate steady for the sixth consecutive time on Wednesday and said it expects the economy to rebound after a rough start to the year.

The central bank’s policy rate remains at 2.25 per cent after the hold, which was widely expected by economists.

Bank of Canada governor Tiff Macklem said in prepared remarks that the economy is still grappling with heightened uncertainty but officials at the central bank are growing more confident that the economy is working its way through those headwinds.

While he signalled that the Bank of Canada’s governing council is still ready to adjust its policy rate if needed, he said officials see the current policy rate as being at the right level to return inflation back to two per cent and support an economic recovery.

Macklem flagged there’s a risk inflation becomes stuck above the central bank’s two per cent target as it eases.

But his prepared statement removes previous references to the possible need for consecutive rate hikes or a further cut depending on how the economy evolves.

Heading into Wednesday’s announcement, recent data suggested to the Bank of Canada that conditions in the labour market and economy were steadily improving after a rough start to the year.

A surprise contraction in the economy to start the year surprised the central bank, which had expected annualized growth of 1.5 per cent in the first and second quarter. Even before then, Macklem noted the economy has struggled to grow.

“Canada’s GDP growth was flat over the past year as the economy adjusted to new tariffs, elevated uncertainty and slower population growth,” he said.

In its updated monetary policy report on Wednesday, the central bank said that temporary drags on auto production and an unexpected lag in government spending in the first three months of the year should unwind and set the second quarter up for growth of 2.5 per cent.

Inflation meanwhile hit 3.2 per cent in May as a global energy shock from the war in Iran sent the cost of gasoline soaring over the spring. The Bank of Canada said in its report that inflation remains near the central bank’s two per cent target when gas prices are taken out of the picture.

That suggests that higher prices from the Iran war so far haven’t spread much into other parts of the consumer basket.

Renewed hostilities between the United States and Iran are pushing up global oil prices again. The cost of gasoline remains “volatile and highly dependent on events in the Middle East,” the report noted.

“We’ve been looking through the direct effects of higher oil prices on inflation, but the longer they remain elevated, the bigger the risk they spill over to other goods and services,” Macklem said.

“As we have said before, we will not let higher oil prices become persistent inflation.”

To gauge lasting impacts from the Middle East conflict, one of the factors the Bank of Canada is tracking is how long supply chain bottlenecks tied to disruptions in the Strait of Hormuz continue to affect shipping volumes.

The central bank expects knock-on effects from the war will continue to fuel higher inflation, particularly at the gas pumps and the grocery store, through to early 2027. Food inflation is expected to be sticky thanks to higher fuel and fertilizer costs in the near term.

Weak demand in the economy could limit how much businesses pass higher costs from the war on to consumers, but the central bank also flagged that a weak Canadian dollar might fuel higher prices on imported goods.

CIBC senior economist Katherine Judge said in a note to clients Wednesday that the central bank's updated forecasts show there's plenty of slack still to be absorbed in the economy.

That view of a softer economy lines up with CIBC's projection that the Bank of Canada will leave its policy rate on hold for the rest of 2026, she argued.

This report by The Canadian Press was first published July 15, 2026.