EN 
As expected, the Bank of Canada held the overnight rate at 2.25% at its third meeting of 2026 (a fourth consecutive hold) and reiterated that, should the central bank’s base-case economic outlook hold true, a policy rate close to current levels remains appropriate.
Regarding the the Middle East conflict and elevated oil prices, Governor Macklem made clear in the press conference that monetary policy is not focused on the jump in energy prices itself—there is little the BoC can do to influence global oil prices—but rather on ensuring it does not turn into persistent inflation.
To date, there is little evidence of this. Broader core inflation measures have slowed and longer-term inflation expectations remain anchored. But the path of oil prices remains uncertain, and the BoC will be watching core inflation measures closely to monitor the ongoing impact.
The Governing Council will continue to look through the immediate effect on inflation. Excess supply in the economy still renders the current policy setting as “appropriate” at the lower end of the estimated ‘neutral range’ (unchanged from previous estimates at 2.25% to 3.25%) but this is also contingent on economic data evolving in line with their base case forecast, which is very much consistent with our own.
Overall, both the BoC and we expect moderate economic growth this year to lead to a gradual absorption of economic slack over time. We continue to expect no change in the overnight rate in 2026 before it edges higher in 2027, alongside a narrowing output gap and downdrift in the unemployment rate.
Relative to that base case, the BoC identified two-sided risks for interest rates: significant tariff increases from the U.S. could prompt rate cuts, while a longer-lasting energy price shock than currently assumed could stoke broader inflation pressures and necessitate consecutive policy rate increases.
BoC’s baseline forecast are in line with our own, with risks on both sides
Two key assumptions underlie the latest set of BoC economic projections regarding the two major supply headwinds currently buffeting the Canadian economy—ongoing tariff risks and conflict in the Middle East.
One is that oil prices will fall from a peak of US$90 a barrel in Q2 2026 to US$75 a barrel by mid-2027; the other is that U.S. tariffs will remain at current levels. Our forecast assumes a decline in oil prices to US$72 a barrel by mid-2027 and U.S. tariffs will moderate but remain elevated going forward.
With those in mind, the BoC’s GDP and inflation forecasts are nearly identical to ours. Growth in Q1 2026 was marked down slightly to 1.5% on an annualized basis (we assumed 1.3%). For 2026 and 2027, the BoC expects gradual improvement in GDP growth from 1.2% in 2026 to 1.6% in 2027, respectively (we assumed 1.1% and 1.5%).
Inflation is expected to peak at around 3% in April before easing back to 2% in 2027. Importantly, BoC’s core inflation forecast is very little changed from their last update in January, implying no meaningful passthrough of high oil prices to broader consumer prices assumed going forward.
In our last forecast update in April, we outlined how elevated oil prices to-date are not expected to reignite the type of systemic, broad-based inflation seen in the years following COVID-19 lockdowns, due to better global supply chain conditions but softer domestic demand in Canada at the onset of this year’s conflict.
These factors are expected to limit the spread of price pressure from a handful of commodities to the rest of the economy, leaving core inflation relatively contained near the 2% target. This should allow the BoC to stand pat, letting borderline stimulative interest rates support a recovery in domestic demand.
Finally, the Bank made limited changes to its assumptions for potential economic growth and estimated range for the neutral overnight rate. The latter unchanged from a year ago at 2.25% to 3.25%, while upward revisions to prior-year potential GDP growth rates offset small downward revisions to assumptions for 2026 through 2027.
About the author:
Claire Fan is a senior economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.
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