Bank of Canada Holds at 2.25% but Slashes 2026 Growth Forecast to 0.7%

35,000+ smart investors are already getting financial news, market signals, and macro shifts in the economy that could impact their money next with our FREE weekly newsletter. Get ahead of what the crowd finds out too late. Click Here to Subscribe for FREE.

Canada’s economy has entered an uncomfortable middle ground: growth is weak enough to concern households and businesses, but inflation remains too unsettled for the Bank of Canada to offer additional rate relief. On July 15, the central bank kept its policy rate at 2.25%, extending a pause that began after its final cut in October 2025.

The decision was widely anticipated. The more striking development was the new economic outlook, which reduced projected growth for 2026 to just 0.7% from 1.2% in April. That downgrade captures a year shaped by trade uncertainty, slower population growth, cautious hiring and volatile energy prices. Yet the Bank is not describing an economy in free fall. It sees consumer spending holding up, exports recovering and growth beginning to broaden, leaving Canadians with a mixed message: the worst may be passing, but a convincing recovery remains far from secure.

The Rate Hold Was About Balance, Not Optimism

Holding the overnight rate at 2.25% was less a declaration of economic strength than a decision to avoid leaning too heavily in either direction. The Bank of Canada is trying to support a fragile recovery while preventing an energy-driven inflation spike from spreading into a wider range of goods and services. Cutting rates could encourage borrowing and spending, but it could also intensify price pressures if the economy strengthens faster than expected.

Raising rates would address inflation more aggressively, yet it could weaken employment, housing and business investment while considerable slack remains in the economy. July marked the sixth consecutive decision without a change after the rate was lowered to 2.25% in October 2025. Governor Tiff Macklem said the current setting remains appropriate to sustain the recovery and return inflation to the 2% target. For now, the Bank is choosing patience until incoming data reveal whether persistent inflation or disappointing growth represents the greater threat.

The 0.7% Forecast Is a Significant Downgrade

The headline number is difficult to soften: the Bank now expects Canada’s real gross domestic product to grow only 0.7% in 2026. That is down from the 1.2% expansion projected in April and the 1.1% estimate released in January. A half-percentage-point revision is meaningful because it represents substantially less new economic activity than policymakers expected only three months earlier.

It also helps explain why many households may feel as though the economy is stagnant even while national GDP remains slightly positive. The downgrade mainly reflects a much weaker start to 2026 rather than a prediction that conditions will deteriorate continuously. Annual forecasts average activity across the entire year, so early weakness weighs heavily even when momentum improves later. The Bank still expects growth of 1.8% in both 2027 and 2028. That outlook suggests the 0.7% result is being treated as a low point in Canada’s adjustment to tariffs and slower population growth, rather than a permanent economic ceiling.

A Weak Start Is Giving Way to a Second-Quarter Rebound

The contrast between the annual forecast and the latest quarterly estimate is one of the outlook’s most important details. The Bank says economic growth stalled in the first quarter but estimates that GDP expanded at an annualized pace of roughly 2.5% in the second quarter. That rebound sounds much stronger than the 0.7% full-year forecast because the figures measure different things: one annualizes a single quarter’s performance, while the other averages activity across all of 2026.

A relatively strong spring cannot completely erase a weak winter. The Bank also cautions that some of the rebound reflects temporary disruptions unwinding rather than a sudden transformation in the economy’s underlying strength. Still, encouraging signs are emerging. Consumer spending has remained solid, exports have resumed growing, housing activity appears to be stabilizing and business investment is projected to improve modestly. The recovery is becoming broader, but policymakers want evidence that the momentum can continue beyond one quarter before declaring that Canada has decisively escaped its slump.

Consumers Are Resilient, but Businesses Remain Cautious

Household spending has been one of the more durable supports beneath the economy. The Bank’s July assessment pointed to continued solid consumption even as Canadians faced higher fuel costs, mortgage renewals and concerns about employment. A household replacing a vehicle, renovating a home or continuing to visit local restaurants may appear to be making an ordinary decision, but those choices collectively help prevent a weak economy from sliding further.

Business confidence tells a more guarded story. The Bank’s second-quarter Business Outlook Survey found that sentiment deteriorated after improving for three consecutive quarters. The share of companies planning or budgeting for a Canadian recession during the next 12 months rose from 9% to 17%. Sales expectations softened, while employment intentions remained below their historical average. There were brighter areas: export outlooks improved, investment intentions remained relatively strong and oil-sector companies reported greater willingness to spend. Nevertheless, many businesses are still delaying major commitments until trade rules, energy costs and customer demand become easier to predict.

The Labour Market Is Better, but Still Soft

Canada’s job market has shown signs of stabilization without returning to full strength. Statistics Canada reported that employment was little changed in June, increasing by 18,000 positions, while the unemployment rate edged down to 6.5%. It was the second consecutive monthly decline and matched the unemployment rate recorded in January. Employment increased among young people and core-aged workers, but declined in manufacturing, agriculture and utilities.

That uneven composition helps explain why the national numbers can improve while workers in particular sectors continue to face a difficult search. The Bank views the labour market through the broader issue of economic slack. Unemployment has generally remained between approximately 6.5% and 7% since late 2024, while relatively few businesses are reporting binding labour shortages. In a stronger expansion, employers would typically compete more aggressively for workers and add hours more rapidly. A durable recovery will therefore require more than rising GDP. It must eventually produce consistent job creation across industries and regions.

Inflation Is Above Target, but Gasoline Is Doing Much of the Damage

Headline inflation increased to 3.2% in May, moving above the top of the Bank of Canada’s 1% to 3% control range. Gasoline was the largest driver, with prices climbing 33.2% from a year earlier amid supply uncertainty connected to conflict in the Middle East. Canadians also encountered faster grocery inflation, including a 9% annual increase in fresh vegetable prices, while air transportation costs rose as airlines absorbed higher fuel expenses.

These are visible expenses that can quickly affect how households perceive inflation. The underlying picture, however, is less alarming. Statistics Canada reported that inflation excluding gasoline was 2.2%, while the Bank’s preferred core measures remained close to 2%. That difference is central to the decision to hold rates instead of raising them. Policymakers can tolerate a temporary energy shock if it fades, but become concerned when higher fuel and transportation costs spread broadly through the economy. The Bank expects inflation to return to approximately 2% in early 2027, provided oil prices decline as anticipated.

Mortgage Borrowers Get Stability, Not Immediate Relief

For homeowners with variable-rate mortgages or home equity lines of credit, an unchanged policy rate generally means no new central-bank-driven adjustment to borrowing costs. Variable products are commonly priced using lenders’ prime rates, which normally move alongside the Bank of Canada’s overnight rate. Fixed mortgage rates are influenced more heavily by government bond yields and lenders’ funding costs, meaning they can still change even when the policy rate remains steady.

The July decision therefore provides predictability, but it does not guarantee cheaper financing. That distinction matters during Canada’s mortgage-renewal wave. CMHC estimated earlier in 2026 that more than 1.5 million households had already renewed mortgages at higher interest rates, with another million expected to sign new terms during the subsequent year. Many borrowers who secured exceptionally low pandemic-era rates still face larger payments when their contracts reset. Holding at 2.25% prevents an additional immediate shock for variable borrowers, but families renewing in 2026 may still need to redirect money from savings, travel or discretionary purchases toward housing costs.

Trade and Geopolitical Risks Still Dominate the Outlook

The Bank identified Canada’s economic relationship with the United States and the conflict in the Middle East as the two largest risks to its forecast. Trade within North America remains largely tariff-free, but sector-specific measures continue to affect exposed industries. Uncertainty can cause damage even before additional tariffs are imposed because companies may postpone hiring, factory upgrades or expansion while awaiting clearer rules.

Energy markets create a different challenge. Higher oil prices can support investment and incomes in producing regions, particularly the Prairies, while increasing transportation, manufacturing and household expenses elsewhere. The Business Outlook Survey found stronger activity expectations among Prairie companies connected to the oil industry, but weaker outlooks across much of the rest of Canada. A depreciating Canadian dollar presents another trade-off. It can make Canadian exports more competitive internationally while increasing the price of imported equipment, food and consumer products. These regional and sectoral differences make a single national interest-rate policy unusually difficult to calibrate.

What Comes Next for Rates and the Economy

The Bank’s base case is a gradual recovery rather than a dramatic rebound. Economic growth is projected to improve to 1.8% in 2027 and remain at 1.8% in 2028 as unused capacity is slowly absorbed. Inflation is expected to return to around 2% in early 2027 and average close to that level afterward. Should those forecasts hold, the Bank may be able to leave rates stable while economic conditions improve.

The outcome is far from guaranteed. Rates could eventually fall if the second-quarter recovery fades, exports weaken or unemployment rises substantially. They could increase if energy-driven costs spread more widely, inflation expectations become less stable or domestic demand accelerates unexpectedly. Economists and financial markets generally expected the rate to remain unchanged for the rest of 2026 when the July decision was released. The next scheduled announcement is September 2, followed by an updated Monetary Policy Report on October 28. Until then, inflation, employment, consumer spending and business investment will help determine whether Canada’s tentative recovery is becoming durable.

This Options Discord Chat is The Real Deal

While the internet is scoured with trading chat rooms, many of which even charge upwards of thousands of dollars to join, this smaller options trading discord chatroom is the real deal and actually providing valuable trade setups, education, and community without the noise and spam of the larger more expensive rooms. With a incredibly low-cost monthly fee, Options Trading Club (click here to see their reviews) requires an application to join ensuring that every member is dedicated and serious about taking their trading to the next level. If you are looking for a change in your trading strategies, then click here to apply for a membership.