The Bank of Canada held its target for the overnight rate at 2.25 per cent yesterday, marking the fifth consecutive time governor Tiff Macklem and the Governing Council have kept policy steady as the central bank navigates a period of elevated uncertainty. The Bank Rate remained at 2.5 per cent and the deposit rate at 2.20 per cent, according to the official rate announcement.

Canada’s economy grew by a surprisingly strong 2.6 per cent in the third quarter, yet the expansion reflected volatility in trade rather than broad-based strength. Final domestic demand was flat during the same period. Looking ahead to the fourth quarter, the Bank expects final domestic demand will grow, but with an anticipated decline in net exports, GDP will likely remain weak before picking up in 2026.

Inflation slowed to 2.2 per cent in October, driven by falling gasoline prices and slower food price increases. While CPI inflation has hovered near the 2 per cent target for more than a year, core inflation measures remain in the range of 2.5 to 3 per cent. The Bank assesses that underlying inflation is still around 2.5 per cent and expects near-term choppiness as last year’s GST/HST holiday affects the prices of some goods and services.

Why the Bank Held Rates Despite Economic Slack

Governor Macklem said during a press conference that the central bank faces a delicate balancing act. Raising rates to dampen inflation could further slow the economy, while easing rates to support growth increases the risk that higher inflation becomes persistent.

The decision to hold reflects competing pressures. CPI inflation rose to 2.8 per cent in April, and Macklem indicated the bank expects it to hover around the 3 per cent mark before gradually easing toward the 2 per cent target. Yet the labour market shows mixed signals.

Employment has shown solid gains in the past three months, with the unemployment rate declining to 6.5 per cent in November. However, job markets in trade-sensitive sectors remain weak and economy-wide hiring intentions continue to be subdued. Macklem noted that employment figures have been volatile month to month, with little net change in jobs since January.

Michael Davenport, senior economist at Oxford Economics, said the current economic backdrop does not warrant a rate increase this year. He argued that for the central bank to raise its policy rate in 2026, core inflation would have to pick up steam and price pressures would have to broaden across the consumer basket.

BMO Economics managing director Benjamin Reitzes noted very little new information emerged from the June policy statement. He said the bank’s line about the economy being weak was a bit of a shift, likely a result of the surprising drop in Canada’s GDP in the first quarter of the year. BMO expects the central bank to continue holding rates through to the end of the year.

Trade Uncertainty and Middle East Conflict Weigh on Outlook

The Bank of Canada identified two key factors driving uncertainty: the ongoing war in the Middle East, which has raised energy prices, and new U.S. tariff threats that continue to weigh on the economy. Global oil prices are roughly 10 dollars a barrel higher than the Bank assumed in its October Monetary Policy Report.

Macklem said the longer oil prices stay high, the more likely it is that those costs bleed into the general economy, which would require the bank to change rates in response. For now, there has been limited evidence of high energy costs being passed through to consumer prices more broadly.

The central bank stated it is continuing to look through the war’s near-term impact on headline inflation but will not let higher energy prices become persistent inflation. This approach mirrors strategies seen in other jurisdictions facing similar pressures tied to inflation and rate hikes.

U.S. trade policy remains a major source of risk for Canada. Macklem highlighted that the upcoming review of the Canada-U.S.-Mexico agreement comes with significant risks for the economy. An outcome that sees current tariff levels ratchet up, or that sees uncertainty persist into the second half of the year, would hamper Canada’s economic recovery.

Andrew Grantham, senior economist at CIBC, said in a note to clients that Wednesday’s rate decision reflects a very patient central bank content to wait and see how the risks play out. CIBC continues to expect no change to the policy rate in 2026 as the current rate level supports a modest recovery in the economy starting later this year.

Recession Debate and GDP Contraction in Early 2026

Statistics Canada reported a slight contraction in real gross domestic product over the first three months of the year—a 0.1 per cent annualised decline, coming off a 1 per cent drop in the fourth quarter of 2025. That slight GDP dip has led to debate over whether Canada is in a recession.

Macklem weighed into the discussion, saying he did not believe the current reality meets the bar. He said most economists define a recession as a significant broad-based decline in economic activity lasting at least one quarter. While growth has been generally flat in many economic indicators over the past year, it has not shrunk, according to Macklem.

More than half of Canadian industries were growing in the first quarter of the year despite the marginal headline decline. Recent economic data, including a strong May jobs report, signals the economy could rebound in the second quarter of the year, Macklem said.

Davenport at Oxford Economics said he believes Macklem has the right interpretation of recent data. The Canadian economy is definitely a little bit weaker than anticipated a couple of months ago, but it is not currently in a recession, he said.

The central bank noted that growth in the economy was expected to resume in the second quarter of 2026. Macklem chalked much of the first-quarter miss up to an unexpected pullback in government spending, which he said can be choppy from one quarter to the next.

Structural Shifts Complicate Policy Path Forward

Governor Macklem said the Canadian economy is going through a period of restructuring, including shifts in trade, the adoption of AI, and slower population growth. These structural changes complicate the economic outlook and will be monitored closely as the bank updates its forecast and assesses where inflation and the economy are headed.

The Bank of Canada stated that if inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2 per cent while helping the economy through this period of structural adjustment.

Financial market odds call for the Bank of Canada to hold rates steady again at its next meeting on July 15, according to LSEG Data & Analytics. However, markets are pricing in a quarter-point hike before the end of the year. Davenport said that misses the mark, arguing the Bank of Canada is more likely going to remain on hold for the remainder of this year.

Ali Jaffery, chief economist at KPMG, said in a media statement that the focus on recent economic weakness gave Macklem’s remarks a dovish tone—suggestive of looser monetary policy rather than any tightening. Risks of persistent inflation seem low in the face of a soft economy, Jaffery argued.

The central bank’s balancing act differs from the approach taken by other major central banks. While Chair Warsh at the U.S. Federal Reserve faces policy tests tied to strong labour market data, the Bank of Canada confronts a weaker employment picture and softer domestic demand.

Global financial conditions, oil prices, and the Canadian dollar are all roughly unchanged since the Bank’s October Monetary Policy Report. Major economies around the world continue to show resilience to U.S. trade protectionism, but uncertainty is still high. In the United States, economic growth is being supported by strong consumption and a surge in AI investment.

The U.S. government shutdown caused volatility in quarterly growth and delayed the release of some key economic data. Tariffs are causing some upward pressure on U.S. inflation. In the euro area, economic growth has been stronger than expected, with the services sector showing particular resilience. In China, soft domestic demand, including more weakness in the housing market, is weighing on growth.

Frequently Asked Questions

Why did the Bank of Canada hold rates at 2.25 per cent?

The Bank of Canada held its policy rate at 2.25 per cent to balance competing risks. Raising rates to dampen inflation could further slow the economy, while easing rates to support growth increases the risk that higher inflation becomes persistent. The central bank believes the current rate level keeps inflation close to the 2 per cent target while helping the economy through a period of structural adjustment.

Is Canada in a recession despite two quarters of GDP decline?

Governor Tiff Macklem said the economy is weak but not clearly in recession. While GDP contracted 0.1 per cent in the first quarter of 2026 and 1 per cent in the fourth quarter of 2025, Macklem noted that most economists define a recession as a significant broad-based decline in economic activity. More than half of Canadian industries were growing in the first quarter, and recent data signals a rebound in the second quarter.

When is the Bank of Canada’s next rate decision?

The next scheduled date for announcing the overnight rate target is January 28, 2026, according to the Bank of Canada. The Bank’s next Monetary Policy Report will be released at the same time. Financial markets are pricing in the possibility of a quarter-point hike before the end of the year, though many economists expect the central bank to remain on hold.

Conclusion

The Bank of Canada’s decision to hold rates at 2.25 per cent reflects a central bank navigating elevated uncertainty with caution. With inflation expected to hover around 3 per cent in the coming months before easing toward the 2 per cent target, and with trade uncertainty and Middle East conflict creating opposing pressures on growth and prices, the Governing Council has opted for a patient approach.

The next several months will prove critical as the bank assesses whether structural shifts—including trade reconfiguration, AI adoption, and demographic changes—require a policy response. For now, Macklem and the Governing Council appear prepared to maintain the current stance, balancing the risks of doing too much or too little in a fragile economic environment.