Interest Rates

Bank of Canada holds policy rate at 2.25% as growth recovery faces inflation and trade risks

The Bank of Canada kept its policy rate unchanged on July 15, 2026, judging that economic growth is resuming and inflation should return to target in early 2027, while risks from oil prices and U.S. trade policy remain elevated.

By Grant Sullivan ·

Key takeaways

  • The Bank of Canada maintained its policy interest rate at 2.25% after weighing a projected recovery in growth against uncertainty in inflation and trade conditions.
  • The Bank expects Canadian GDP growth of 0.7% in 2026, followed by 1.8% in 2027 and 2028, with second-quarter 2026 growth projected at about 2.5%.
  • Inflation reached 3.2% in May, largely reflecting gasoline, but the Bank projected it would ease to about 2.5% in the second half of 2026 and reach 2% in early 2027.
  • Businesses face an environment in which export activity and investment may improve, but tariff exposure, soft labour conditions, weak housing and volatile energy costs remain key,

Rate held as Bank sees a narrower policy trade-off

The Bank of Canada’s Governing Council left the policy interest rate at 2.25% on July 15, 2026. In deliberations published July 29, the Council said the expected strengthening in growth during the second half of the year and a projected decline in inflation toward target supported leaving the setting unchanged.

The decision followed a period in which the Canadian economy had effectively stalled: GDP did not expand between the first quarter of 2025 and the first quarter of 2026. Still, the Council said more recent indicators pointed to a recovery in the second quarter of 2026, with activity broadening beyond consumer and government spending.

For companies with borrowing needs, the unchanged benchmark rate provides the immediate monetary-policy backdrop. But the Bank emphasized that its outlook carries substantial uncertainty and that it will assess both the pace of the recovery and the inflation outlook as new information emerges.

Growth outlook rests on exports, investment and adaptation

The Bank projected overall GDP growth of 0.7% in 2026, accelerating to 1.8% in both 2027 and 2028. It expected growth of about 2.5% in the second quarter of 2026. Exports had resumed growing after contracting, supported by the U.S. economy and higher global oil prices, although they remained on a lower path.

Business responses to the Bank’s survey indicated that fewer U.S. customers were delaying orders because of trade uncertainty. Some firms reported adjusting production, shipping and customs processes. Yet exports in industries directly affected by U.S. tariffs remained below their levels before the trade conflict.

Near-term business investment was expected to receive support from oil and gas investment, with investment growth projected to broaden over time. The Council nevertheless flagged a risk that the anticipated revival in exports and investment may not occur, noting both had previously underperformed expectations.

Energy-driven inflation remains the central uncertainty

Inflation rose to 3.2% in May after the Middle East war lifted the global benchmark oil price to roughly US$120 per barrel and higher refining margins increased gasoline prices. Inflation excluding gasoline was 2.2%, while core inflation measures remained near 2%.

The Bank said oil prices had subsequently fallen to about US$75 per barrel as the United States and Iran negotiated an interim agreement in June, although renewed hostilities during the Council’s deliberations again raised oil prices and disrupted transportation. Assuming oil prices fall in line with market expectations at the time of the July Report and gasoline margins narrow, inflation was projected to ease to about 2.5% in the second half of 2026 before returning to the 2% target in early 2027.

Council members agreed to look past the direct effect of higher global oil prices on inflation because spillovers into other prices had been limited so far. They also said that a prolonged period of elevated oil prices could broaden inflation pressures and potentially require a monetary-policy response.

Domestic demand and trade conditions remain watchpoints

The labour market was still characterized as soft despite renewed job growth in May and June. The unemployment rate declined to 6.5% in June, remaining within the 6.5% to 7% range seen for most of the prior year. The Bank identified a risk that consumer spending could weaken if hiring does not improve.

Housing also remained weak, although resale activity returned to positive growth in the second quarter after falling in the preceding two quarters. The Council cited condominium inventories in Toronto and Vancouver, lower population growth and affordability challenges as factors that could impede a further housing recovery.

Alongside domestic risks, the Council identified the potential for new U.S. tariffs as a continuing downside risk to growth. Its central conclusion was that growth was resuming and inflation was easing, but that a durable expansion would depend on how businesses and the economy continue to adjust to trade and geopolitical disruptions.