The Bank of Canada held its benchmark interest rate at 2.25 per cent on Wednesday, the sixth consecutive hold, as governor Tiff Macklem expressed growing confidence that the economy is moving through persistent headwinds. The decision was widely expected by economists.
Speaking to reporters after the announcement, Macklem said the central bank’s governing council sees the current rate as appropriate for returning inflation to 2 per cent while supporting an economic recovery. But he warned that instability in the Middle East continues to weigh heavily on the outlook. Much of the bank’s policy stance depends on the global energy market.
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Rate hikes still on the table if oil prices surge
If gasoline prices move up again and stay high for an extended period, the Bank of Canada has not ruled out a series of rate hikes to guard against persistent inflation. “I do want to stress though, that’s not our base case,” Macklem said. “At this moment, our best judgment is, where we are now looks appropriate.”
Recent data had suggested steady improvement in the labour market and broader economy after a rough start to the year. A surprise contraction in the first quarter caught the central bank off guard — it had expected annualized growth of 1.5 per cent in both the first and second quarters. The central bank now expects growth of 2.5 per cent over the last three months of the year.
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Macklem noted the economy has struggled to grow over the past year in the face of tariffs, high uncertainty and slowing population growth. Consumer resilience and a stabilizing housing market are helping the economy adjust, he said. Exports, even to the United States, are showing growing momentum, which should support more business investment in the months ahead. “What we’re hearing from companies is they are adapting. They’re finding ways to work with their clients. They’re reconfiguring their supply chains. They’re getting on with business,” Macklem said.
Leslie Preston, senior economist at TD Bank, said there wasn’t much change in the Bank of Canada’s overall outlook, even after the substantial miss for first-quarter growth. The bank now expects real GDP to rise by 1.8 per cent in 2027 and 2028 — a tick or two higher than its April forecast. But Preston said those figures don’t reflect an economy firing on all cylinders. “They did, at the margin, express a little more confidence in the signs of Canada’s economy improving,” she said.
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Inflation and the Middle East conflict
Inflation hit 3.2 per cent in May as a global energy shock from the Iran war sent gasoline costs soaring over the spring. So far, data suggest those higher prices haven’t spread much into other parts of the consumer basket. But renewed hostilities between the United States and Iran are pushing global oil prices up again, and the cost of gasoline remains “volatile and highly dependent on events in the Middle East,” the bank’s monetary policy report noted.
“We’ve been looking through the direct effects of higher oil prices on inflation, but the longer they remain raised, 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.”
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