Bank of Canada Holds Rate at 2.25% as Economic Recovery Gains Momentum

The Bank of Canada kept its key policy interest rate unchanged at 2.25% on Wednesday, July 15, signalling cautious confidence that the Canadian economy is beginning to recover after a prolonged period of weak and uneven growth.

The central bank also maintained the Bank Rate at 2.5% and the deposit rate at 2.20%, saying the current level of borrowing costs remains appropriate to support the recovery while gradually returning inflation to its 2% target.

The decision marked the sixth consecutive meeting in which the Bank of Canada left its benchmark rate unchanged. It followed an aggressive easing cycle that brought the policy rate down to its current level in October 2025. The decision had been widely anticipated, with all 36 economists surveyed by Reuters predicting no change.

Bank of Canada Governor Tiff Macklem adopted a more optimistic tone, saying economic growth appears to have resumed after stalling over the past year. Although uncertainty surrounding U.S. trade policy continues to weigh on the outlook, Canadian consumers have remained resilient and businesses are finding ways to adapt.

The Bank estimates that Canada’s economy expanded at an annualized rate of 2.5% in the second quarter, following virtually no growth during the first three months of the year. The improvement reflects solid consumer spending, renewed export growth and early signs that the weakened housing market is beginning to stabilize.

Business investment is also expected to increase modestly, supported in the near term by higher spending in the oil and gas sector. The Bank noted that more Canadian companies are learning to operate amid uncertainty surrounding tariffs and the annual review process affecting the Canada-United States-Mexico Agreement.

Despite the stronger second-quarter performance, the central bank lowered its full-year economic growth forecast for 2026 to 0.7%, down from the 1.2% projected in April, reflecting the particularly weak beginning to the year. The economy is then expected to grow by 1.8% in both 2027 and 2028, gradually absorbing the remaining economic slack.

Inflation, however, remains a source of concern. Canada’s annual inflation rate climbed to 3.2% in May, largely because of higher gasoline prices linked to the conflict in the Middle East. Excluding gasoline, inflation stood at 2.2%, while the Bank’s preferred measures of core inflation remained close to the 2% target.

The Bank expects headline inflation to remain elevated in the short term before easing gradually over the coming months and returning to around 2% in early 2027. That forecast will depend heavily on the direction of global oil and gasoline prices and on whether higher energy costs spread into the prices of other goods and services.

For Canadian households, the decision means there will be no immediate additional relief for borrowers with variable-rate mortgages, lines of credit and other loans tied to the central bank’s policy rate. However, keeping the rate unchanged offers a measure of stability for borrowers planning their monthly expenses and mortgage renewals.

The Bank of Canada said risks remain unusually high, particularly those linked to the war in the Middle East and the future of Canada’s trade relationship with the United States. It stressed that it remains prepared to adjust monetary policy if economic growth or inflation moves significantly away from its current projections.

The next Bank of Canada interest-rate announcement is scheduled for September 2, 2026, followed by the release of its next Monetary Policy Report on October 28.