A consensus of economists widely expected Bank of Canada governor Tiff Macklem to announce Wednesday that the bank will leave its key interest rate unchanged. Adrian Wyld/The Canadian Press file photo
By Ana Pereira Staff Reporter Toronto Star
The Bank of Canada kept its key interest rate at 2.25 per cent for the sixth consecutive meeting as it continues to work through economic uncertainty.
While the central bank said that it is expecting oil prices and inflation to ease this year, governor Tiff Macklem acknowledged that rising tensions in the Middle East pose a threat to that forecast.
“Let’s be frank, the situation in the Middle East remains very volatile,” he said during a press conference on Wednesday.
“It looks like it’s a long way from being resolved. And so, yes, if oil prices go higher and they remain higher, there may well still be a need for consecutive (interest rate) hikes.”
Since the Bank of Canada wrapped up its economic forecast on Friday, the U.S. announced a resumption of the blockade in the Strait of Hormuz and launched fresh airstrikes on Iran, causing global oil prices to spike again.
As it stands, the bank’s forecast is that the annual inflation rate in Canada will fall from around three per cent in the second quarter to 2.5 per cent over the second half of 2026. It will then return to the two per cent target in 2027.
Macklem cautioned that this forecast is highly dependent on what happens to global oil and gas prices going forward.
“As we’ve said before, we will not let higher oil prices become persistent inflation.”
For now, the governor said that policymakers believe the current policy rate is appropriate to sustain economic recovery and bring inflation — currently sitting at 3.2 per cent — back to target.
Wednesday’s decision was widely expected by economists, as the economy has been showing signs of recovery following a weak start to 2026.
“The bank is firmly on hold,” BMO economist Douglas Porter said in a note to clients following the announcement. “We expect them to remain there through the rest of 2026 — assuming that oil prices don’t flare dramatically higher from here.”
Overall, Macklem noted that consumer spending has been solid, while housing activity appears to be recovering. Business investment is also picking up, driven by the oil and gas sector.
The labour market has been weak but is improving, with the unemployment rate falling to 6.5 per cent last month.
And, Macklem said, while the Canada-United States-Mexico Agreement (CUSMA) wasn’t renewed on July 1, businesses are managing to navigate through the trade uncertainty, according to the latest business outlook survey.
“Our growth outlook is similar to our April forecast, but the data we have received since April have increased our confidence that the economy is indeed working its way through this period of global upheaval,” the governor said.
The bank is expecting GDP growth to be 0.7 per cent in 2026 and 1.8 per cent in both 2027 and 2028.
Meanwhile, the bank’s preferred “core” measures of inflation — which strip out volatility — have been steady, supporting the case for Wednesday’s pause.
