Data Flashes

The Bank of Canada, as expected, held the overnight rate at 2.25% for the fifth consecutive meeting.

Governor Macklem did not dismiss weaker-than-expected economic data since April but pointed to better-looking underlying details that left their assessment of the economy relatively unchanged from April, with the current stance of monetary policy still appropriate to balance the growth-inflation tradeoff.

The central bank continues to balance competing risks – repeating for a second consecutive meeting that U.S. tariff threats could still cause the economy to weaken in a way that would require rate cuts, but that if higher energy prices lead to broader inflation pressures (not the BoC’s or our own base-case) then “consecutive increases in the policy rate” could be needed.

In short, their key message of staying prudent yet nimble was retained to preserve flexibility for a rate move if necessary. Below, we explore three key questions we had ahead of today’s meeting in more detail.

1. Has the central bank’s assessment on the current state of the Canadian economy changed since April?

Not really. Governor Macklem used very neutral, factual language when describing downside data surprises, saying economic slack as relatively unchanged from April. He was more explicit, however, about the expectation for the economy to remain in excess supply in Q2 despite growth, consistent with what was already projected in their base case back in April.

Much as we are, we think the BoC is adopting a wait-and-see approach to confirm the persistence of weaker-than-expected economic data since April, amid a highly volatile and revision-prone data environment.

We remain cautiously optimistic that per-person and per-worker economic activity will continue to broadly improve this year. But persistent economic slack still suggests an extended runway before their next moves, in line with our expectation for the BoC to remain on hold for the rest of 2026.

2. Has the BoC’s assessment of economic impact from elevated oil prices changed?

Not really. Governor Macklem reiterated that the BoC is “looking through” the Middle East conflict’s near-term impact on inflation, and that “so far, there has been limited evidence of broad-based pass-through of higher energy prices to other consumer prices”, although that remains a key risk.

In our preview last week, we highlighted a widening gap between real GDP growth and real GDI growth in Q1, the latter incorporates the terms-of-trade impact that allows Canada to purchase more goods and services given additional revenue from higher oil prices.

This gap also highlights the unevenness of oil prices’ economic impact, with rising real GDI mostly flowing to the oil-producing regions while households everywhere bear the cost.

Indeed, there remain limits on how effectively monetary policy can address supply shocks whose economic impacts are usually uneven. Our expectation for moderate BoC rate hikes in 2027 rests entirely on the realization of improving Canadian economic conditions, not on higher oil prices.

3. Any changes in the central bank’s forward guidance for future rate decisions?

Not really. The BoC’s key message looking forward remains that the central bank wants to stay cautious but nimble, willing to move interest rates in either direction if needed. 

On U.S. tariffs, the BoC appears more concerned about the growth impact given limited Canadian countermeasures. Although the fact that CUSMA exemptions were yet again preserved in the Section 301 investigations (set to replace Section 122 tariffs in July) is encouraging ahead of likely negotiations to extend the free trade agreement over the summer. 

On oil prices, the central bank appears much more worried about the inflationary impact than the destruction to household purchasing power and subsequently spending. To date, we continue to track resilience in our own consumer spending data and limited signs of reduced purchases of non-energy items, although that remains a risk as well.

Overall, today’s meeting didn’t really surprise us, with the BoC mostly reiterating its existing forward guidance. The July meeting will see the release of the Monetary Policy Report, which should include more details on how the BoC has incorporated recent downside data surprises into their base case projections. 

We continue to expect the BoC will remain on hold throughout the rest of 2026 before hiking moderately against an improving economic backdrop in 2027. 

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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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