Bank of Canada holds rate at 2.25% as weak economy offsets inflation

The Bank of Canada held its benchmark rate at 2.25% on June 10, the fifth consecutive pause, as policymakers judged a weak economy and limited spillover from higher oil prices outweighed the risk of above-target inflation.

"In responding to the rise in inflation, the governing council did not want to overreact, but nor did it want to be too slow to respond," according to minutes of the June 4 deliberations published Wednesday. The six-member governing council voted unanimously to hold.

Canada's economy unexpectedly contracted at a 0.1% annualized pace in the first quarter, marking two consecutive quarters of decline. Consumer spending showed resilience, rising 1.4% in the period and 2% on a per-capita basis, the minutes noted. Inflation reached 3.2% in May, above the central bank's 2% target, but Gov. Tiff Macklem said the pressure was concentrated in energy and that "we are not seeing, so far anyways, much spreading of higher oil prices to prices of other goods and services."

The decision was made before the U.S. and Iran reached a tentative pact to reopen the Strait of Hormuz, which has since pushed crude prices 26% lower from their early June peak. Macklem said the agreement removed some upside inflation risk. Most economists expect the Bank of Canada to keep rates unchanged through 2026 as weak growth and trade uncertainty from the upcoming USMCA review constrain the outlook.

A Stretched Labor Market and Subdued Growth

The labor market remained soft even as employment posted an unexpected gain in May, the deliberations showed. The unemployment rate has hovered between 6.5% and 7% since the start of the year, and the economy continues to operate below its potential. The first-quarter GDP decline was driven partly by a drop in government spending, which the council noted "can be choppy from one quarter to the next."

April's headline inflation stood at 2.8%, within the central bank's expectations, and measures of core inflation were close to the 2% target. The proportion of consumer price index components rising faster than 3% has also declined, suggesting price pressures remain contained outside the energy sector.

Trade Uncertainty Clouds the Outlook

The upcoming review of the Canada-U.S.-Mexico Agreement adds another layer of uncertainty. U.S. and Canadian officials appear far apart on trade talks, according to U.S. officials, and most analysts do not expect an imminent agreement to renew the pact for another 16 years. Without a deal, the agreement could face annual reviews for the next decade, with a potential collapse in 2036.

The Bank of Canada's next rate decision is scheduled for July 15. The central bank has kept its policy rate unchanged since the start of the year, after cutting it to 2.25% in December 2025, according to the Bank of Canada's published schedule. The hold stance reflects a governing council that is prepared to look through near-term energy-driven inflation while the economy operates below capacity and trade risks loom.

This article is for informational purposes only and does not constitute investment advice.