The BoC stays on hold as uncertainties ease
The Bank of Canada kept its policy rate at 2.25% this afternoon, a sixth consecutive hold that leaves policy at the floor of the Bank's 2.25–3.25% neutral range, where it has sat since last October's cut.
The decision matched both our own expectations and a unanimous sell-side consensus. The Governing Council once again pointed to the balance of risks posed by higher oil prices on the one hand, and USMCA renegotiation on the other, as justification for leaving policy unchanged. As such, it is little surprise that the loonie also remains unmoved in post-announcement trading.
Arguably, the one change of note stems from a sense that uncertainties facing the Bank have eased since May. The accompanying MPR described an economy past the worst, largely marking to market any forecast revisions.
Having stalled in Q1, growth is estimated to have rebounded to an annualised 2.5% in Q2, though a weak start to the year has also seen the Bank cut its 2026 growth projection to 0.7% from 1.2% in April.
On prices, the Bank noted that headline inflation reached 3.2% in May, driven by war-driven gasoline costs, but core measures remain close to 2%, limiting concerns. Staff now see inflation averaging 2.5% this year, easing through H2 before returning to target in early 2027, albeit conditioned on oil prices stabilising between US$70-US$75 per barrel.
That assumption has, admittedly, been challenged by recent developments. Renewed Middle East hostilities, and an associated rise in oil prices, come too late to be incorporated into the Bank’s latest forecasts, a point conceded by Governor Macklem in his opening remarks. Washington's July 1st decision not to extend USMCA offers a countervailing source of risk, however. And in the round, the associated uncertainties have reduced relative to earlier in the year. Against that backdrop, Macklem's opening comments stuck to a familiar script, looking through any volatility in near-term headline inflation, while standing ready to respond as needed.
For the loonie, today’s announcement changes little. USDCAD entered the decision below 1.41, near one-month lows, aided by firmer crude and a reduction in Fed tightening bets on the back of Tuesday's much softer than expected US CPI report.
With a hold fully discounted and guidance unchanged, initial reaction has been muted, and markets continue to price in roughly 20bps of BoC tightening by year-end.
We think no change in rates is ultimately the more likely outcome. But, with a similar call penciled in for the Fed in 2026, rate differentials should close in favour of USDCAD downside over the coming months.