EconoFACTS

July 15, 2026 | 10:38

BoC Rate Decision and MPR — Still Nil-Nil in the Second Half

Economist

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter brings more than three decades of experience analyzing gl... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter brings more than three decades of experience analyzing gl... (Read more)

The Bank of Canada held its key lending rate unchanged today at 2.25%, marking the sixth consecutive meeting on hold. And it doesn't seem like the Bank is in any rush whatsoever to move off the sidelines, even if their rhetoric leans slightly hawkish. The Bank's tone around the economic outlook was a tad more upbeat, with plenty of suggestions that growth was turning the corner after a flat year up to Q1. Meantime, while the Bank looks for inflation to gradually ebb over the next year, the Statement warned that the longer oil prices "remain elevated, the bigger the risk they spill over to other goods and services." The Bank specifically notes that the forecasts below were finalized "on Friday", and oil prices have since popped almost $10. Our call on H2 CPI below reflects a higher assumption for crude prices than the BoC—we are roughly $5 above their assumption of "US$70-US$75".

A notable change in the Bank's Statement is the removal of discussion of potential consecutive rate hikes (to deal with the inflationary spillover from high oil prices) and/or talk of a rate cut (should the USMCA be canceled). However, the Bank still frets about the cloud of uncertainty and warns that 'we will not let higher oil prices become persistent inflation".

On the economic growth forecast: The language around the economy was generally more positive, noting that "sources of economic growth appear to be broadening." The forecast was upgraded as well, with Q2 GDP seen at 2.5% (from 1.5%)—more than reversing the two-quarter dip around the turn of the year—and Q3 introduced at 1.5%. However, the Q2 strength "largely reflects the unwinding of temporary factors". Importantly, "more businesses report they are finding ways to navigate" the uncertainty around trade. And, the output gap is still -0.5% to -1.5%, a bit wider than what they expected in April (but consistent with our estimate).

While growth is expected to pull back to a more subdued pace in the second half, the outlook for both 2027/28 has been revised up slightly (perfectly offsetting the downgrade to this year, as it happens). The Bank cites increased "confidence that the economy is indeed working its way through this period of global upheaval". Financial conditions are judged to have eased, boosted by robust equities, a weak Canadian dollar, tight credit spreads and flat bond yields. On balance, the Bank is reasonably close to our view on growth (on the button for this year as a whole), if a bit more cautious in the next two years.

Bottom Line: The recent run of firmer data, as well as robust financial markets, has the BoC a bit more upbeat on the near-term outlook, but not enough to convincingly shift the medium-term view. That's in light of the uneven pattern for GDP over the past 18 months, and the lingering uncertainty around the USMCA. Until there are clear signs that the output gap is closing on a consistent basis, it's going to be challenging for the BoC to turn more hawkish. The volatility in energy prices is also keeping the BoC on high alert, as that's the X factor on the near-term inflation outlook. The Bank is firmly on hold, and we expect them to remain there through the rest of 2026—assuming that oil prices don't flare dramatically higher from here.

Now on to the (delayed) press conference...