OTTAWA—The Bank of Canada held its interest rate steady at 2.25 percent for a sixth straight meeting, saying that economic growth appears to be recovering and inflation looks set to fall as oil prices decline.
“The data we have received since April have increased our confidence that the economy is indeed working its way through this period of global upheaval,” Bank of Canada Governor Tiff Macklem told reporters on July 15.
Macklem said economic growth seems to have resumed in Canada after stalling over the past year due to elevated uncertainty and slower population growth. He said U.S. trade policy and tariffs on Canada have continued to add pressure, but Canadian consumers and businesses have adapted.
The governor said consumer spending appears to be solid, housing activity has picked up, and export growth has resumed and is expected to strengthen. While the Canada-United States-Mexico Agreement (CUSMA) will now be subject to annual reviews, “more businesses report they are finding ways to navigate through the uncertainty,” he added.
Macklem said while inflation had risen to 3.2 percent in May due to higher gas prices, Canada is “not seeing broad spillovers of higher energy prices.” Macklem said price pressures related to the Iran war are still working their way through the economy, but “continued economic slack” is reigning in some consumer prices.
Macklem said the Bank of Canada has been “looking through” the direct effects of higher oil prices due to the war in Iran and their impact on inflation in Canada.
“But the longer they remain elevated, the bigger the risk they spill over to other goods and services. As we have said before, we will not let higher oil prices become persistent inflation,” he said.
Asked by reporters whether the bank was being “overly optimistic” in its projections after a recent business survey found the Iran war had weakened business confidence and lowered sales expectations, Macklem said: “We’re calling it as we see it. So yes, our baseline forecast is that the economy is going to improve.”
Macklem said business surveys have shown that “the overall index isn’t very optimistic,” but there is more optimism going forward when it comes to companies’ investment and hiring plans.
“There could be new developments, and that momentum we see could stall. That is something we’re watching very closely,” he said.
Monetary Policy Report
The Bank of Canada also released its July Monetary Policy Report (MPR), which painted an optimistic picture of Canada’s economy in the medium-term. It stated that the economy is showing signs of “improvement” and inflation is expected to fall from its peak of 3.2 percent in May.The report forecast economic growth of 2.5 percent in the second quarter of 2026, after remaining flat in the first quarter, due to the “unwinding of temporary factors that restrained growth in the first quarter.”
The central bank said Canadian businesses have adapted to “elevated geopolitical uncertainty” caused by U.S. trade policy and the Iran war. Exports will contribute to growth over the next few quarters, consumer and government spending remain steady, and business and residential investment are expected to recover.
While the Bank of Canada had projected growth of 1.5 percent in the first quarter of 2026, Statistics Canada reported in May that Canada’s economy contracted by 0.1 percent in the quarter on an annualized basis, after shrinking 1 percent in the fourth quarter of 2025. Two straight quarters of contraction meet the definition of a technical recession.
Macklem told reporters in June that he does not believe Canada is in a recession, echoing a similar analysis from the C.D. Howe Institute. The institute is widely regarded as the authority on determining when Canada is in a recession.
The July monetary policy report said economic growth was slow in the first quarter of 2026 due to a decline in government spending, motor vehicle production, oil and gas investment, and housing activity. But GDP growth picked up in the second quarter, led by exports of energy and non-commodity goods, while oil and gas investment rebounded in response to higher energy prices.
The report said GDP is expected to grow 0.7 percent in 2026 and 1.8 percent in 2027, down from its April MPR projection of 1.2 percent growth in 2026 and 1.6 percent growth in 2027.
The central bank also projects inflation will decline to 2.5 percent in the second half of the year due to lower gasoline prices, reaching its 2 percent target by the start of 2027. This projection is based on the oil price futures curve as of July 9, which showed the price of West Texas Intermediate (WTI) falling to US$75 by January 2027.
Oil prices spiked to over $110 at the beginning of the year due to the U.S.-Iran war, but fell to around $75 after the two countries signed a memorandum of understanding in June to work towards ending the conflict.
Disagreements over several aspects of the memorandum and continued skirmishes led U.S. President Donald Trump to declare on July 8 that the agreement with Iran was “over.” The two countries have since been trading strikes for nearly a week. Iran has also said the Strait of Hormuz is once again closed to all traffic, and Trump has threatened to attack Iranian oil infrastructure. The price of WTI has risen to around $US78.
The Bank of Canada will release its next interest rate decision on Sept. 2.
