EN 
As widely expected, the Bank of Canada held its overnight rate at 2.25% for a sixth consecutive meeting and de-emphasized both upside inflation risks and downside economic growth risks in a signal the central bank’s comfort with maintaining interest rates at current levels has increased.
The accompanying Monetary Policy Report showed higher headline CPI inflation projections for 2026 relative to April’s forecast, driven by elevated gasoline refinery margins that are expected to gradually normalize alongside oil prices this year. Core CPI inflation projections (the average of CPI-trim and median) remained largely unchanged from April, still expected to hover around 2% through 2028.
Risks to those inflation forecasts and to interest rate policy remain. However, the explicit reference to the potential need to lower interest rates if the U.S. were to impose new tariffs and potential “consecutive increases” in interest rates if higher oil prices lead to generalized inflation were dropped from the press conference opening statement.
Governor Macklem reiterated in question responses that risks persist, but the BoC’s base case assumptions regarding both elements—that U.S. tariffs and CUSMA exemptions will remain in place and energy prices will follow the futures curve lower—align with ours and have largely held.
Beyond these, the BoC also flagged non-energy global cost pressures, a weaker Canadian dollar, and a narrower-than-estimated output gap as other potential drivers of future inflation pressures. On the downside, a sudden tightening in global financial conditions and/or weaker-than-expected economic growth in Canada could push inflation lower.
Getting back to base case, the BoC projects GDP growth at a slower 0.7% rate in 2026, consistent with our own published forecast, which largely reflected the Q1 downside surprise. Growth is expected to accelerate in Q2 to 2.5% (quarterly annualized) before easing to 1.5% over H2 2026, ending the year at a weaker level with the gap mostly recouped by accelerating growth in 2027.
With potential GDP growth assumptions unchanged, slower prior quarter growths implied “slightly more excess supply than anticipated” in Q2, still within the –1.5% to –0.5% range where the output gap has remained over the past year. Going forward, both the BoC and we continue to assume excess slack will be slowly absorbed as GDP growth accelerates above potential, without requiring even lower interest rates.
Indeed, while the economic outlook remains highly uncertain, the flow of economic data since the BoC last met in June has been broadly positive and consistent with a cautiously optimistic view that per-person and per-worker economic conditions are gradually improving.
We continue to expect the BoC to be steady but nimble, holding rates at borderline accommodative levels through 2026, before improving economic conditions prompt moderate rate hikes in 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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