Bank of Canada Holds Interest Rates as Economy Shows Signs of Recovery

The Bank of Canada kept its key interest rate unchanged at 2.25% on Wednesday, saying the Canadian economy is beginning to recover but continues to face risks from the Middle East conflict and uncertain U.S. trade policy. 

The decision marked the central bank’s sixth consecutive rate hold and was widely expected by economists.  

In its accompanying statement, the Bank said Canada’s economy stalled during much of the past year as businesses and consumers adjusted to new tariffs, slower population growth and elevated uncertainty. However, the Bank estimates the economy expanded at an annualized rate of about 2.5% during the second quarter. 

Consumer spending remains solid, exports are improving, and housing activity appears to be stabilizing after a weak period. Business investment is also expected to increase modestly, supported by spending in the oil and gas sector. 

On the other hand, the labour market remains soft. Canada’s unemployment rate stood at 6.5% in June and has remained between roughly 6.5% and 7% since late 2024. 

The Bank said it expects the Canadian economy to grow by just 0.7% in 2026 before expanding by 1.8% in both 2027 and 2028. 

Inflation remains another concern. The annual inflation rate climbed to 3.2% in May, largely because the Middle East conflict pushed gasoline prices higher. Excluding gasoline, inflation was 2.2%, while underlying measures remained close to the bank’s 2% target. 

Inflation is expected to remain elevated in June before gradually declining and returning to around 2% in early 2027. However, the outlook depends heavily on future oil and gasoline prices.  

Globally, higher energy costs are expected to slow economic growth in 2026. The bank forecasts global growth of 2.75% this year, followed by a recovery to about 3.25% in 2027 and 2028. 

The U.S. economy remains strong, supported by consumer spending and artificial intelligence investment, while China continues to benefit from robust exports. 

The Bank of Canada said the current interest rate is appropriate to support the recovery while bringing inflation back to target. It added that it is prepared to adjust rates if economic or inflation conditions change.