The Bank of Canada held its benchmark interest rate steady at 2.25% on Wednesday, marking the sixth consecutive meeting where it has left policy unchanged, a move in line with market expectations. The central bank indicated that the economy is showing signs of improvement but continues to face significant uncertainty.

Governor Tiff Macklem stated that the current level of borrowing costs remains appropriate, supporting the economic recovery and helping to guide inflation back to the 2% target. The bank noted in its monetary policy report:

"Following a year of weakness, the Canadian economy is showing signs of improvement. Growth is expected to pick up, and inflation is projected to gradually decline from recent highs. However, economic uncertainty remains elevated."

Growth and Inflation Outlook

The central bank forecasts annualized growth of 2.5% for the second quarter, slowing to 1.5% in the third quarter. Due to economic weakness earlier in the year, it revised its 2026 growth forecast down to 0.7% but raised its projections for 2027 and 2028 to 1.8%.

Regarding inflation, the bank raised its 2026 headline inflation forecast from a previous 2.3% to 2.5%, citing higher oil prices, elevated gasoline refining margins, and a weaker Canadian dollar as factors contributing to recent price pressures.

Core inflation, however, is expected to remain subdued. Officials noted that the breadth of underlying price pressures is narrowing, suggesting that rising oil prices have not yet spilled over into other goods and services, and overall price formation remains contained.

The bank anticipates that headline inflation will return to the 2% target early next year, a path largely consistent with its previous assessment.

Inflation Risks Remain

The central bank identified the ability of businesses to pass on higher input costs to consumers as a key upside risk to inflation. It also expressed caution regarding productivity estimates, suggesting actual productivity may be weaker than anticipated. This could imply a smaller output gap and, consequently, greater inflationary pressure.

Regarding commodity assumptions, the bank, based on futures curves from July 9, projects the price of Brent crude oil to fall to $70 per barrel by the end of 2027. Meanwhile, it upgraded its export outlook, supported by increased energy-related activity.

The bank stated that "despite some volatility, recent data are generally consistent with the outlook presented in the April Report," a comment signaling a steady policy path ahead.

Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers are scheduled to hold a press conference at 10:45 a.m. Ottawa time, with markets closely watching for any further commentary on the interest rate outlook and economic risks.