The Bank of Canada kept its key policy interest rate unchanged at 2.25 per cent on Wednesday, while forecasting a gradual improvement in the Canadian economy following roughly 18 months of stagnant growth.
In its latest Monetary Policy Report, the central bank said economic activity is beginning to show signs of recovery and underlying inflation remains close to its target. However, uncertainty surrounding U.S. tariffs and the conflict in the Middle East continues to pose significant risks to Canada’s economic outlook.
The Bank said Canada’s gross domestic product was roughly unchanged between the first quarter of 2025 and the first quarter of 2026. Economic growth was close to zero during that period, falling well short of the 1.5 per cent pace projected by the central bank in April.
Several temporary factors weighed on the economy in the first quarter, including an unexpected decline in government spending, lower motor vehicle production and a sharp drop in oil and gas investment.
Housing activity also weakened amid affordability pressures, slower population growth and elevated economic uncertainty. Consumer spending, however, remained resilient despite higher gasoline prices and broader concerns about the economy.
The Bank estimates economic activity rebounded in the second quarter, supported by stronger exports and an increase in residential investment. As a result, the Canadian economy is expected to have grown at a rate slightly above one per cent during the first half of 2026.
Inflation and global risks remain key concerns
The Bank identified Canada’s trade relationship with the United States and the ongoing conflict in the Middle East as two major risks to inflation and economic growth.
Headline inflation has climbed above three per cent, although the central bank said it could ease if oil prices and gasoline refinery margins decline. Inflation excluding gasoline remains near two per cent.
The Bank’s projections do not account for the recent breakdown of the U.S.-Iran ceasefire or the renewed slowdown in commercial shipping through the Strait of Hormuz, developments that could add further pressure to global energy prices.
Meanwhile, the Canadian economy continues to adjust to U.S. tariffs and uncertainty surrounding the review of the Canada-United States-Mexico Agreement. Business investment has remained broadly flat amid the uncertain trade environment.
The labour market also continues to show signs of weakness. Canada’s unemployment rate has generally ranged between 6.5 and seven per cent, which the Bank said indicates excess supply remains in the economy.
Despite the risks, the central bank expects economic conditions to gradually improve as Canada emerges from a prolonged period of weak growth.
