Bank of Canada holds at 2.25% as trade and oil risks collide

The Bank of Canada faces its toughest balancing act in two years: inflation at 3.2% versus an economy that just emerged from back-to-back quarterly contractions.

OTTAWA — The Bank of Canada is expected to keep its policy rate at 2.25% for a sixth consecutive meeting on Wednesday, as policymakers weigh sticky inflation against a fragile recovery complicated by renewed US-Iran hostilities and the unraveling of North American trade architecture.

All 12 economists surveyed by The Wall Street Journal predict the central bank will hold, with most forecasting no change through the end of 2026 and a rate increase in the first half of next year. The decision marks six straight meetings without a move since the bank's last reduction in October 2025, which brought the rate to the bottom of its estimated neutral range of 2.25% to 3.25%.

"The hurdle for a policy shift, in either direction, is quite high at the moment," said Benjamin Reitzes, economist at BMO Capital Markets. "With no clear near-term catalyst to drive positive economic momentum and the output gap likely to keep underlying inflation contained, policy rates are expected to remain unchanged into next year."

Annual inflation accelerated to 3.2% in May, breaching the central bank's 1% to 3% control range for the first time since December 2023, driven by higher energy costs. Yet measures of core inflation have held near 2%, and gasoline prices retreated after a tentative US-Iran deal last month before last week's re-escalation pushed crude oil higher again. Governor Tiff Macklem said after the June decision the bank would look through the war-related inflation spike but would act if energy costs produced persistent, generalized price pressures.

The economy contracted in the fourth quarter of 2025 and again in the first three months of 2026, meeting the technical definition of a recession. But activity rebounded more strongly than expected in April, and the unemployment rate edged down to 6.5% in June. Still, the recovery remains uneven. A KPMG Canada survey this week found that four out of 10 manufacturers have either moved production to the United States or are considering doing so because of the Trump administration's trade policy, and more than half have paused, reduced or canceled capital spending. Business investment in Canada has declined for five straight quarters.

The uncertainty extends to the US-Mexico-Canada trade treaty, which the Trump administration has signaled it will not renew. That, combined with the re-escalation in the Middle East, leaves the Bank of Canada navigating crosscurrents that Andrew Kelvin, chief Canada strategist at TD Securities, said make it "premature to rule out cuts in the medium term given recent choppy activity data, normalization in oil prices, and ongoing uncertainty around USMCA negotiations."

Carl Gomez, chief economist at Centurion Asset Management, offered a contrasting view, arguing that what ails the Canadian economy is structural, not cyclical. "Previous language about concern over inflation likely rules out further rate relief," he said, pointing to the country's adjustment to a sea-change in US trade policy, aging demographics and an artificial-intelligence-driven investment boom.

The Bank of Canada will release its updated quarterly Monetary Policy Report alongside Wednesday's decision, revising the April forecasts of 1.2% growth and 2.3% inflation for 2026. Markets will parse the statement and Macklem's press conference for any shift in forward guidance. The last time the bank held rates for this long — from October 2023 through July 2024 — it eventually cut by 25 basis points as the economy softened. This time, the path is less clear: OIS markets are not pricing a move until mid-2027, while the divergence between the Bank of Canada's neutral stance and potential Federal Reserve action could keep the Canadian dollar under pressure.

This article is for informational purposes only and does not constitute investment advice.