The Bank of Canada is widely expected to leave its overnight interest rate unchanged at 2.25 per cent when it announces its latest rate decision on Wednesday.
If policymakers choose to hold the rate, it will mark the sixth consecutive meeting without a change.
The central bank is clearly navigating an uncertain economic environment shaped by global conflict, inflation concerns and ongoing trade tensions with the United States.
A difficult balancing act
Recent geopolitical and trade developments have complicated the Bank of Canada’s outlook.
The latest policy meeting comes after the United States announced it would not renew the Canada-United States-Mexico Agreement (CUSMA) for another 16 years. Instead, it triggered a series of annual reviews over the next decade.
At the same time, renewed conflict in the Middle East has added further uncertainty after the collapse of the interim peace agreement between the United States and Iran. Attacks on commercial shipping in the Strait of Hormuz and ballistic missile strikes on a U.S. military base in Jordan followed this.
These developments have created a difficult environment for central bankers trying to balance inflation risks with slowing economic growth. Worst of all is the sensless destruction, loss of life and crumbli
Tony Stillo, director of Canada economics at Oxford Economics Ltd., said policymakers are likely to remain cautious.
“Our take is that they’re going to hold and leave it as is. They’ll have to be nimble and respond depending on where they see the economy going for the next little while,” Stillo said.
“The question is whether the latest developments represent a bump in the road or are we just emerging from the eye of the storm and we’re going to see a re-escalation in oil prices.”
Stillo noted that raising interest rates to combat inflation could unnecessarily weaken an already sluggish economy if oil prices retreat quickly. On the other hand, cutting rates too soon could allow inflationary pressures to spread beyond energy into other parts of the economy.
Inflation is under close watch
TD economist Maria Solovieva said one of the Bank of Canada’s primary concerns will be determining whether higher energy prices are beginning to affect the cost of other goods and services.
TD expects rising energy costs to gradually filter through the economy. As a result, the impact on core inflation will be limited by Canada’s relatively weak economic conditions.
Bank of Canada Governor Tiff Macklem has consistently stated there is little evidence that higher energy prices have led to widespread inflation across the economy.
Although headline inflation rose to 3.2 per cent in May, largely due to higher gasoline prices, the Bank’s preferred measures of core inflation have remained relatively stable.
“We still expect the Bank of Canada to hold interest rates,” Solovieva said. “It would be interesting to see what the Bank of Canada is thinking about inflation expectations.”
Recession risks continue
Both Oxford Economics and TD Economics believe recession risks remain elevated, particularly as uncertainty surrounding Canada’s trade relationship with the United States continues.
The possibility of the U.S. withdrawing from CUSMA earlier than expected has raised concerns about future private investment and export activity.
Economists now believe it is unlikely that a revised trade agreement will significantly reduce existing tariffs, leaving important Canadian industries facing ongoing uncertainty. This includes steel, aluminum, lumber and automotive manufacturing industries.
Oxford Economics recently revised its outlook, lowering its forecast for Canada’s real GDP growth in 2027 to 1.6 per cent, while continuing to project 0.7 per cent growth in 2026.
The firm also expects the labour market to remain under pressure.
Slower population growth may ease some pressure on the unemployment rate. However, moderate excess capacity in the labour market is expected to push unemployment from its current 6.5 per cent to approximately 7.0 per cent by the third quarter.
Governmental economic support
Despite the challenges, there are some factors expected to provide support.
Stillo pointed to the new Canada Groceries and Essentials Benefit designed to support household spending and provide modest economic stimulus.
“Our prior forecast had assumed that there would have been some kind of a deal in the third quarter of 2026, and it would have lowered most tariffs. That’s not happening,” Stillo said.
“We’re now expecting, still, an improvement in the economy next year, but a slower pace of growth than what we had before.”
TD Economics remains somewhat more optimistic. It forecasts Canada’s real GDP will grow 1.7 per cent by the end of this year and 1.8 per cent by the end of 2027, supported by a recovery in exports.
However, the firm also expects growth to remain constrained by:
- Slower population growth
- Ongoing U.S. tariffs
- Softer consumer confidence
- reduced household spending
Elevated unemployment is also expected to persist until late 2027.
Looking ahead
For now, economists agree that the Bank of Canada is likely to remain on the sidelines while it assesses how inflation, trade policy and geopolitical events evolve over the coming months.
As Solovieva noted, the outlook remains highly uncertain.
“It’s hard to be too optimistic. We don’t really know how this trade uncertainty will continue to impact the economy,” she said. “So far, it’s been specific to certain sectors, but it doesn’t mean that it couldn’t change very quickly.”
With inflation risks and economic weakness pulling policymakers in opposite directions, the Bank of Canada is expected to continue taking a measured, data-driven approach until the outlook becomes more clear.
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