Bank of Canada holds rates, says the economy is growing again

By Promit Mukherjee and David Ljunggren

OTTAWA, July 15 (Reuters) – The Bank of Canada left its benchmark overnight rate unchanged at 2.25% on Wednesday as widely expected and said growth would strengthen in the second half of the year as inflation pressures eased.

The bank predicted the economy would grow by 2.5% on an annualized basis in the second quarter after grinding to a halt in the first quarter amid disruption caused by the Middle East conflict and uncertainty over U.S. trade policy.

“After stalling over the past year, economic growth looks to have resumed in Canada. While U.S. trade policy continues to be a headwind, consumers have been resilient and businesses are adapting,” Governor Tiff Macklem said in his opening remarks.

His comments marked the first time this year when he has shifted to a more upbeat tone on the economy.

The bank slightly raised its growth forecasts for 2027 and 2028 but cut its 2026 projection to 0.7% from 1.2% in April, reflecting a weaker start to the year.

The BoC raised its 2026 inflation forecast to 2.5% from 2.3% in April, but said inflation should remain near the midpoint of its 1%-3% target range over the next two years.

All 36 economists surveyed by Reuters had expected the central bank to hold rates, with a majority forecasting no change until at least July next year.

Money markets are pricing in a hold for the rest of the year.

“We continue to believe the Bank of Canada will remain on the sidelines for the rest of this year, but significant changes to the outlook for oil prices or trade with the US could easily change that view,” Royce Mendes, managing director at Desjardins, wrote in a note.

The decision marked the sixth time in a row that the central bank has kept its key policy rate unchanged after an aggressive easing cycle last year that brought the rate down to the current level in October.

Macklem dropped comments he made in June, when he said there could be a need for consecutive rate increases if inflation spiked.

POLICY DILEMMA

The BoC has previously said the current phenomenon of high inflation and weak growth has put policymakers in a bind.

Weak growth would normally argue for lower rates to support the economy, but easing policy could add to inflation pressures while prices remain elevated.

The rate of 2.25% sits at the lower end of the bank’s estimated neutral range and is generally considered sufficiently accommodative to provide modest support to the economy without fuelling inflation.

“The Bank of Canada has shifted from standing ready, to act, to now standing by,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce.

A weaker loonie and renewed strength in commodity prices will make the Bank think twice before lowering interest rates, he said, but also added that expectations of a rate hike have now largely evaporated.

The evolution of Canada’s trade relationship with the United States and the war in the Middle East remain the two most important risks to the outlook for inflation, the bank said in a quarterly monetary policy report.

“We’ve been looking through the direct effects of higher oil prices on inflation, but the longer they remain elevated, the bigger the risk they spill over to other goods and services. As we have said before, we will not let higher oil prices become persistent inflation,” said Macklem.

The Canadian dollar pared early gains and was trading down 0.05% to C$1.4062 against the U.S. dollar, or 71.11 U.S. cents. Yields on the two-year government bonds slipped further down 3 basis points to 2.627%.

(Reporting by Promit Mukherjee; Additional reporting by Fergal Smith and Caroline StaufferEditing by Aurora Ellis)