Key Takeaways
- The Bank of Canada held its overnight interest rate steady, marking a seventh consecutive pause.
- Policymakers underscored the heightened risk to growth from deepening trade rift with the US and higher inflation from the Iran war.
- Some analysts see a shift in the Bank’s tone towards a hike, but most believe rates to remain steady through 2026.
The Bank of Canada left its overnight interest rate steady at 2.25% for the seventh time in a row. Policymakers on Wednesday attributed their decision to the crosswinds of higher energy prices from renewed Middle East hostilities and the prospect of economic damage from the new and threatened US tariffs. Many analysts say the central bank will continue weighing these forces from the sidelines through at least year-end.
In its policy statement, the Bank said the decision to hold rates was driven by opposing forces: the risk of higher inflation and the sustainability of the recent economic recovery. Canada’s July inflation showed signs of reheating, as the Consumer Price Index rose to 3.0% from 2.8% in June. Month-over-month core CPI, excluding food and energy, climbed to 1.9% from 1.8% the prior month. Meanwhile, Canada’s gross domestic product rebounded, growing 3.3% on an annualized basis from 0.3% in the first quarter.
“The upside risks to inflation have increased, while new tariffs make growth prospects more uncertain,” the Bank said. It remains “prepared to adjust monetary policy as needed.” The Bank has kept its key overnight interest rate unchanged since December after lowering it by 1 percentage point in 2025.
Here’s a closer look at economist commentary on the Bank of Canada’s decision and the outlook for interest rates.
Bank of Canada to Remain on Sidelines Through 2027
“The statement sums things up nicely, as ‘upside risks to inflation have increased, while new tariffs make growth prospects more uncertain’ leaving the Bank of Canada pinned to the sidelines. Policymakers will be patient as they assess how those risks evolve. We continue to expect the Bank of Canada to remain on hold into 2027.”
—Benjamin Reitzes, managing director, Canadian rates and macro strategist at BMO Economics
The Bank’s Inflation Focus Reveals a Hike Bias
“The Bank of Canada delivered a more hawkish message alongside its policy rate announcement today, noting that ‘the upside risks to inflation have increased’ and it is ‘prepared to adjust monetary policy as needed.’ We would not take this as a signal of an imminent rate increase, but we will probably need to pull forward our forecast for the first hike, currently penciled in for the second quarter of 2027.
“The rest of the communications suggest that this was not a signal of a hike as soon as the next meeting in October. Given it looks increasingly likely that oil prices will remain near current levels over the rest of the year rather than fall back as we originally assumed, an interest rate hike at the final meeting of the year, in December, is arguably now looking more likely than our current forecast that the Bank will wait until June 2027.”
—Stephen Brown, chief North America economist at Capital Economics
No Rate Moves Expected Through Year-End
“To no surprise, amidst the fog of a trade war, the Bank of Canada opted to leave interest rates unchanged today, and in a meeting that doesn’t require a new economic projection, didn’t really provide one. It noted solid US growth, global resilience, and the evident and broadly based rebound in the Canadian economy in Q2. But newly heightened uncertainty over trade relations clouds that picture too much to be definitive about what lies ahead.
“Inflation risks are tied to a potential spillover from rising oil prices and tariffs, but upside risks to inflation, and downside risks to growth, justified a wait and see stance. The Bank did judge that the direct impact of the latest tariff round would not be large, but cited the uncertainties over trade as being a further drag. The market seems to be putting more weight on the inflation concerns than on the lack of confidence over growth prospects, but we see little prospect for a policy change in either direction over the rest of the year given that both the oil and trade war stories could still shift in the months ahead.”
—Avery Shenfeld, chief economist at CIBC Capital Markets
Next Likely Rate Move is Higher, But Not This year
“We take this statement as more hawkish than July and much more hawkish than June—at the very least, the bank is clearly not dovish. The biggest shift comes in the combination of stronger growth and higher inflation risk. Core measures remain close to target and Q2 GDP printed 3.3% annualized. Macklem has no urgency and every incentive to wait. However, should the economy continue along its current course, the next move will be a hike. This might not materialize until 2027, with the Bank of Canada waiting to see what happens with tariffs and energy prices.”
—Philip Petursson, chief investment strategist at IG Wealth Management
No Rate Hike Until 2027
“Overall, the statement and remarks seem to skew hawkish, when they should probably read more neutral. With core inflation at target and the economy operating with some slack, there is no need to move rates, and that’s what we saw today: Talk hawkish, do nothing, maintain credibility. We view this as the path of least resistance.
“If the trade war peters out and/or the economy continues its rebound, we will close the output gap sometime in late 2026 or early 2027, which means they will want to move rates back to the mid-point of neutral (they estimate neutral to be 2.25% to 3.25%, so perhaps move rates up towards 3%). If the strength we saw in Q2 fades, they will likely remain on hold for even longer. With energy prices still elevated, the hurdle for rate cuts is high. So, in our view, on hold, with the balance of risks tilted to hikes in 2027.”
—Etienne Bordeleau-Labrecque, vice president and portfolio manager at Ninepoint Partners.
Rate Hold to Last Until Next Year
“Today’s statement struck an even-handed assessment of the economy. Recent data suggest growth has regained some momentum, but policymakers remain wary of renewed trade tensions and ongoing geopolitical uncertainty that could alter the outlook quickly. Absent an updated MPR, the next Bank of Canada decision (October 28) will likely carry added significance as the first opportunity to provide fresh forecasts in light of recent developments.
“For now, that leaves the Bank of Canada in a comfortable holding pattern. With core inflation pressures still broadly contained and tariff-related risks pulling growth and inflation in opposite directions, we continue to expect rates to remain unchanged through next year, while the Bank preserves the flexibility should conditions deteriorate or inflation prove more persistent than anticipated.”
—Marc Ercolao, economist at TD Economics
