Bank of Canada holds key rate steady as confidence grows in economic rebound

Macklem flagged there’s a risk inflation becomes stuck above the central bank’s two per cent target as it eases.

His prepared statement removes previous references to the possible need for consecutive rate hikes or a further cut depending on how the economy evolves.

Speaking to reporters after the rate announcement on Wednesday, Macklem made clear that much of the bank’s outlook and policy stance hinges on the global energy market.

If gas prices move up again and remain high for longer, a series of rate hikes are still on the table to guard against persistent inflation.

“I do want to stress though, that’s not our base case,” he said.

“At this moment, our best judgment is, where we are now looks appropriate. But we underlined uncertainty is high and we’re prepared to adjust monetary policy as needed.”

Heading into Wednesday’s announcement, recent data suggested to the Bank of Canada that conditions in the labour market and economy were steadily improving after a rough start to the year.

A surprise contraction in the economy to start the year surprised the central bank, which had expected annualized growth of 1.5 per cent in the first and second quarter.

Macklem noted the economy has struggled to grow over the past year in the face of tariffs, elevated uncertainty and slowing population growth.

In its updated monetary policy report on Wednesday, the central bank said that temporary drags on auto production and an unexpected lag in government spending in the first three months of the year should unwind and set the second quarter up for growth of 2.5 per cent.

Macklem pointed to consumer resilience and stabilization in the housing market as helping the economy adjust through headwinds.

The central bank is also seeing growing momentum in exports — even to the United States. That should help support more business investment in the coming months, Macklem said.

“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,” he said.

Inflation hit 3.2 per cent in May as a global energy shock from the war in Iran sent the cost of gasoline soaring over the spring.

So far, data suggest that higher gas prices from the Iran war so far haven’t spread much into other parts of the consumer basket.

Renewed hostilities between the United States and Iran are pushing up global oil prices again though. The cost of gasoline remains “volatile and highly dependent on events in the Middle East,” the report noted.

“We’ve been looking through the direct effects of higher oil prices on inflation, but the longer they remain elevated, 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.”

To gauge lasting impacts from the Middle East conflict, one of the factors the Bank of Canada is tracking is how long supply chain bottlenecks tied to disruptions in the Strait of Hormuz continue to affect shipping volumes.

The central bank expects knock-on effects from the war will continue to fuel higher inflation, particularly at the gas pumps and the grocery store, through to early 2027. Food inflation is expected to be sticky thanks to higher fuel and fertilizer costs in the near term.

Weak demand in the economy could limit how much businesses pass higher costs from the war on to consumers, but the central bank also flagged that a weak Canadian dollar might drive higher prices on imported goods.

CIBC senior economist Katherine Judge said in a note to clients Wednesday that the central bank’s updated forecasts show there’s plenty of slack still to be absorbed in the economy.

That view of a softer economy lines up with CIBC’s projection that the Bank of Canada will leave its policy rate on hold for the rest of 2026, she argued.

An ongoing strike among security officers at the Bank of Canada’s head office in Ottawa on Wednesday prevented the central bank from holding its typical briefing with reporters before the rate decision was made public and pushed officials to instead hold a virtual press conference with Macklem.

This report by The Canadian Press was first published July 15, 2026.

Craig Lord, The Canadian Press

by The Canadian Press

Bank of Canada holds key rate steady as confidence grows in economic rebound

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