Bank of Canada Holds Rates at 2.25% as Signs of Economic Recovery Begin to Emerge

The Bank of Canada left its overnight lending rate unchanged at 2.25% on July 15, signalling that while the economy is beginning to recover, policymakers remain cautious amid persistent inflation risks and ongoing uncertainty.

After months of economic headwinds driven by tariffs, heightened global uncertainty, and slower population growth, the Bank said there are growing signs that Canada's recovery is gaining traction. Even so, labour market conditions remain subdued, with the unemployment rate holding at 6.5% in June, a level that has remained largely unchanged since late 2024.

Economic growth has shown encouraging momentum. The Bank estimates real GDP expanded at an annualized 2.5% in the second quarter, supported initially by temporary factors that are now fading. More importantly, officials noted that growth is becoming increasingly broad-based.

The housing market appears to be stabilizing after a prolonged slowdown, while consumer spending has remained resilient and exports have resumed growing. Business investment is also expected to improve modestly, helped in part by continued activity in Canada's oil and gas sector.

Inflation, however, continues to present a challenge. Headline consumer prices rose 3.2% in May, largely reflecting higher gasoline prices following tensions in the Middle East. Excluding gasoline, inflation was a more moderate 2.2%, with the Bank's preferred core inflation measures remaining close to its 2% target.

The Bank expects headline inflation to remain elevated in the near term before gradually easing, with inflation projected to return to around 2% by early 2027. That outlook, however, remains highly dependent on the direction of global oil prices.

Looking ahead, the Bank forecasts economic growth of 0.7% in 2026, followed by 1.8% growth in both 2027 and 2028.

The Governing Council said the current policy rate strikes the right balance between supporting the economic recovery and keeping inflation under control. Officials reiterated that they remain prepared to adjust monetary policy if economic conditions or inflation risks change.