Keeping Interest Rates Steady, Bank of Canada Acknowledges Its “Dilemma”

Key Takeaways

• The Bank of Canada left its overnight interest rate unchanged, marking a fifth consecutive hold.
• Policymakers highlighted the complexity of responding to opposing forces of slower growth and higher inflation from the Iran war.
• Some analysts see a slight shift in the Bank’s tone away from rate hikes, but most believe policy will be on hold throughout 2026.

For the fifth time in a row, the Bank of Canada held its overnight interest steady at 2.25% on Wednesday, as it juggles the economic impact of Iran war-driven energy prices and trade uncertainty. Analysts say the central bank is in no hurry to change rates, and this hold could be extended throughout the year.

In its policy statement, the Bank underscored the challenge of balancing weaker-than-expected first-quarter economic activity with a reacceleration in inflation to 2.8% in April from 2.4% the month before, stemming from the war in the Middle East. “Economic weakness combined with rising inflation is a dilemma for monetary policy,” said Bank Governor Tiff Macklem at the press conference following the announcement. “Raising rates to dampen inflation could further slow the economy. Easing rates to support growth increases the risk that higher inflation becomes persistent.”

For that reason, the Governing Council decided to look past the Iran war’s near-term inflationary effects. But policymakers reiterated their readiness to enact multiple rate hikes conveyed in the April Monetary Policy Report: “if energy prices stay high, we will not let their effects become broad-based persistent inflation.” At the same time, the Bank acknowledged that it may need to cut rates to support the economy, should “the United States impose significant new trade restrictions on Canada.”

The Bank cut the overnight rate by 1 percentage point over the course of 2025 before moving to the sidelines in December.

Following the announcement, most analysts—including those at Vanguard, BMO, TD Economics, and CIBC—say that despite energy-driven inflation, economic weakness and trade uncertainty will prevent the Bank from hiking rates this year. In contrast, analysts at Mackenzie and IG Wealth forecast that a rate cut could come as early as later this year

Markets were little changed by the news. The Canadian dollar rose 0.31% against the US dollar to C$1.39, or 0.71 US cents. The S&P/TSX Composite Index edged 0.17% lower to 34,369.55, while the Morningstar Canada Index slid 0.26% to 6,089.99. The yield on Government of Canada 2-year bonds ticked 0.02 percentage points lower to 2.82%.

Here’s a closer look at commentary on the Bank of Canada’s decision and the outlook for interest rates.

Bank of Canada on Hold Through 2026

“Very little new information from the Bank of Canada, as the June policy statement and opening statement were similar to April’s. The extra line about the economy being ”weak” is a touch more dovish, but there’s still concern about the potential for rising inflation from higher energy prices. We continue to expect the Bank of Canada to stay on hold through the rest of 2026.”

—Benjamin Reitzes, managing director, Canadian rates and macro strategist at BMO Economics

No Rate Move Expected Until Next Year

“The slightly dovish shift [a tilt towards easing policy] in language from the Bank of Canada today provides support to our forecast that it will leave interest rates unchanged this year … Governor Tiff Macklem has tweaked some of the key phrases in his opening statement to the press conference. Back in April, Macklem said that ‘if the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small.’ Today, he notes that ‘economic weakness combined with rising inflation is a dilemma for monetary policy’ and that ‘holding the policy rate unchanged balances those risks.’

“That tweak makes us a bit less concerned about the possibility that the Bank might have wanted to raise interest rates modestly simply to position itself back in the middle of its 2.25% to 3.25% neutral range estimate, leaving us comfortable with our view that the Bank is unlikely to move in that direction until at least early 2027.”

—Stephen Brown, chief North America economist at Capital Economics

Bank of Canada Appears Set to Stay on Hold

“Overall, we view today’s communication as highlighting a very patient central bank that has plenty of time to wait and see how risks to the economy play out. We continue to see no change in interest rates this year, and that rates at their current level should support a recovery in the economy later this year and into 2027, assuming some of the uncertainties regarding oil prices and trade lessen during that time period.”

—Andrew Grantham, senior economist at CIBC Capital Markets

The BoC Is in No Hurry to Move Rates

“For the moment, the Governing Council seems very comfortable leaving rates unchanged. It’s a bit surprising that Macklem largely repeated the language used in April, given the persistent weakness in Canadian economic indicators and the tame nature of underlying inflation. That said, markets aren’t taking the bait this time. Despite his commentary on the possibility of consecutive rate hikes, Government of Canada bond yields are slightly lower on the day.”

—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets

Rate Hike Expectations Could Give Way to a Cut

“Unfortunately for those looking for a strong signal in either direction, the Bank didn’t say much. Coming off two disappointing quarters of negative GDP growth on an annualized basis and three negative quarters out of the last four, the Bank couldn’t simply overlook the deceleration in economic activity. And while last month’s jobs data was an encouraging sign, excluding the COVID period, the 12-month average job gains are still near the lowest in 10 years. These are economic conditions that the Bank can’t ignore. And by its statement, it didn’t and at the same time, gave nothing away.

“Nonetheless, while the Bank’s mandate is price stability, with a target of 2% inflation +/- 1%, given the economic conditions, there is room for the Bank of Canada to cut the overnight rate and provide some stimulus. This runs counter to other central bank postures, in particular what is becoming the prevailing view that the US Federal Reserve may be forced into a hike before the end of the year. However, the Canadian economy is not the US economy, and the Bank recognizes that. Views for the Bank of Canada to raise its overnight rate once before the end of the year should quickly turn into expectations for a cut.”

—Philip Petursson, chief investment strategist, IG Wealth Management

No Rate Hike Until 2027

“The statement was largely a copy of April’s, noting both risks of a hike and cut under various scenarios. The Bank of Canada continues to emphasize it will not let inflation move materially higher, but also continues to stress it views the hostilities in the Middle East as temporary and will look through. On the other hand, the Bank continues to be concerned over the outcome of USMCA [United Sates-Mexico-Canada Agreement], and disruptions in the agreement to long-established supply chains could necessitate some easing in policy rates.

“The Bank of Canada appears to be on hold for the foreseeable future. Mackenzie continues to see significant risks to USMCA implementation as well as other domestic macro headwinds, and expects the Bank to cut rates before year end.”

—Dustin Reid, chief strategist, fixed income at Mackenzie Investments

Rate Hold to Last Through the Year

“The outlook remains highly uncertain. Oil prices have come off their peaks but are still high as uncertainty about the course of the conflict in the Middle East persists. On the other hand, negotiations around the CUSMA review have yet to get started, casting a pall over trade prospects. Recent data suggest a second-quarter bounce-back in growth, but one that is insufficient to absorb all of the excess capacity in the economy. Given the competing forces on inflation, we expect the Bank of Canada to stay on hold through the balance of the year.”

—Andrew Hencic, director and senior economist at TD Economics

A Rate Hike Is Unlikely This Year

“Elevated uncertainty and the energy price shock associated with the US–Iran conflict are likely to weigh on global demand, shaping the backdrop against which the Bank of Canada is setting its policy rate. Canada stands out among advanced economies in that higher oil prices may provide a modest near‑term boost to GDP, on the order of 10 to 20 basis points, reflecting its position as a net energy exporter.

“However, this growth impulse arrives alongside an inflationary shock. Higher energy prices are pushing up headline inflation and raising the risk that the disinflation process stalls in the near term. For the Bank of Canada, this creates a more complicated policy environment. While growth may receive a temporary lift, inflation dynamics limit the central bank’s flexibility. In our view, this trade-off makes it more difficult for policymakers to pivot toward rate cuts, reinforcing our expectation that the Bank of Canada’s policy rate will remain unchanged at 2.25% through year‑end 2026.”

—Ashish Dewan, investment strategist at Vanguard Canada