Bank of Canada keeps interest rates unchanged for the sixth consecutive time: Economy shows signs of improvement, inflation expected to return to 2% target early next year.

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The Bank of Canada kept its benchmark interest rate unchanged at 2.25% on Wednesday, marking the sixth consecutive meeting with no change, in line with market expectations. The central bank stated that the economy is showing signs of improvement, but still faces considerable uncertainty.

Governor Tiff Macklem said that the current level of borrowing costs is appropriate, helping to support economic recovery and drive inflation back to the 2% target. In its monetary policy report, the bank noted:

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

Economic Growth and Inflation Forecasts

The central bank expects the annualized economic growth rate to reach 2.5% in the second quarter and slow to 1.5% in the third quarter. Due to weak economic performance at the start of the year, the bank lowered its 2026 growth forecast to 0.7%, but raised its forecasts for 2027 and 2028 to 1.8%.

In terms of inflation, the bank raised its overall inflation forecast for 2026 from the previous 2.3% to 2.5%, mainly due to rising oil prices, high gasoline refining margins, and a weaker Canadian dollar, all contributing to recent price pressures.

However, core inflation is expected to remain moderate. Central bank officials noted that the breadth of underlying price pressures is narrowing, indicating that rising oil prices have not yet spread to other goods and services, and overall price formation remains under control.

The Bank expects overall inflation to return to the 2% target early next year, a trajectory that is consistent with previous assessments.

Inflation Upside Risks Cannot Be Ignored

The central bank cites businesses passing input costs onto consumers as a major upside risk to inflation. In addition, the bank remains cautious in its productivity estimates, believing that actual productivity may underperform expectations, which would mean a smaller output gap and greater inflationary pressures.

On commodities assumptions, the central bank, based on the July 9 futures curve, expects Brent crude prices to fall to $70 per barrel by the end of 2027. Meanwhile, energy-related activity has increased, prompting the bank to upgrade its export outlook.

The bank stated, "Despite some volatility, recent data show that the economic trajectory is generally consistent with the outlook in the April report," signaling policy stability going forward.

Tiff Macklem and Senior Deputy Governor Carolyn Rogers are scheduled to attend a press conference in Ottawa at 10:45 a.m., where the market will closely watch their further statements on interest rate prospects and economic risks.

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