The Bank of Canada left its key policy rate unchanged at 2.25% on Wednesday but warned that persistently high energy prices and a renewed Canada-U.S. trade dispute are increasing risks to the inflation outlook.
The decision marked the seventh consecutive hold since the Bank cut its overnight rate to 2.25% in October 2025. The rate has now been unchanged for just over 10 months, and Wednesday’s decision was broadly anticipated by financial markets.
The Bank said the Canadian economy strengthened substantially in the second quarter, with GDP expanding at a 3.3% annualized pace after very weak first quarter growth. Consumer spending increased, housing activity rebounded, and both exports and business investment rose sharply.
The unemployment rate also eased to 6.4% in July, although the Bank said labour demand remains subdued.
On the other hand, headline inflation has been hovering near 3%, largely because of persistently high gasoline prices linked to the continuing Middle East conflict. Excluding gasoline, inflation was 2.2% in July, while measures of core inflation remained close to the Bank’s 2% target.
So far, the Bank said there has been little evidence that higher energy costs are spreading broadly into other prices. However, with the Strait of Hormuz still constrained and oil and refinery margins remaining elevated, the risk of broader inflationary spillovers is increasing.
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