Turbulent month of economic data leaves Bank of Canada right back where it started

Warren Lovely, managing director, chief rates and public sector strategist at National Bank Financial, joins BNN Bloomberg to digest the latest BoC surveys.

OTTAWA — The Bank of Canada is set to make its fifth interest rate announcement of the year on Wednesday following a turbulent few weeks on the global stage and in Canadian economic data.

Despite the flurry of developments since the central bank’s last rate decision in June, most economists are expecting monetary policymakers to leave the key borrowing rate unchanged at 2.25 per cent.

The Bank of Canada has been walking a tightrope lately as forces like U.S. tariffs and the Iran war threaten to both weaken growth and push inflation higher.

The annual rate of inflation hit 3.2 per cent in May as the Middle East conflict and shuttered Strait of Hormuz spurred a global energy shock in the spring. That marks the highest rate of inflation since late 2023.

Global oil prices receded after Iran and the United States agreed to a ceasefire in mid-June, but hostilities reignited between the nations last week, casting doubt over a lasting peace deal.

Tony Stillo, director of Canada economics at Oxford Economics, said those renewed pressures reinforce the bind the Bank of Canada finds itself in.

“This is exactly the risk that we still continue to highlight: a re-escalation, a resurgence in prices and those concerns the Bank of Canada had in their last meeting, saying we have to be ready to react in either direction — and that’s where unfortunately where we may be again,” he said.

The future direction for the policy rate could be higher or lower, central bank officials say, depending on whether the bank needs to lean against higher prices or stimulate growth.

Bank of Canada governor Tiff Macklem has said the bank will look through the short-term rise in inflation tied to the Iran war.

What the bank’s governing council is more worried about, he said, is if that inflationary bout shows signs of spreading to other areas of the consumer basket.

RBC senior economist Claire Fan said that while inflation topped the Bank of Canada’s target range of one to three per cent in May, there were some encouraging signals beneath the hood.

A review of each category suggests price pressures from the Iran war were not spreading far beyond the gas pumps, Fan said.

“A lot of those concerns with inflation surrounding its persistence have, if anything, come down quite a bit,” she said.

The Bank of Canada’s own quarterly survey of businesses released a week ago suggested that roughly a third of firms facing higher prices from the Middle East conflict were preparing to pass on those costs to consumers.

But Fan noted the bulk of the central bank’s survey was conducted in May, before global oil prices were falling on the prospect of a ceasefire and the Strait of Hormuz re-opening.

Meanwhile, Statistics Canada’s April GDP report suggested the economy was already bouncing back from an unexpected contraction in the first quarter.

Real GDP rose 0.5 per cent in April and early estimates for May suggest the economy continued to grow.

The labour market has also shown signs of a stabilizing after sharp losses in the first four months of the year.

Fan said the recent data reinforce that the Bank of Canada ought not to react too strongly when data swings in one direction or another.

“The bank, if anything, has made a right decision to really remain flexible and not react immediately to soft economic growth data or higher oil prices,” she said.

Since the Bank of Canada’s last decision in June, Canada has seen a key milestone in North American trade negotiations pass by. On July 1, the United States opted to send the Canada-U.S.-Mexico agreement to annual reviews, leaving businesses mired in trade uncertainty.

With trade uncertainty persisting, Oxford Economics last week revised down its GDP forecast for 2027 to 1.6 per cent, 0.4 percentage points lower than its previous outlook. The firm continues to forecast growth of 0.7 per cent this year.

Stillo said he now expects the Bank of Canada will remain on hold not only for the rest of 2026, but for the bulk of next year as well.

He sees the central bank’s policy rate eventually rising back to 2.75 per cent, but only once growth meaningfully picks up in late 2027 or early 2028.

Fan said she doesn’t expect the Bank of Canada will react too strongly to the July 1 trade development because few were expecting a resolution to the tariff disputes this month.

The central bank’s April forecast also accounted for the status quo holding on the trade front, as well as a gradual decline in global oil prices.

With those assumptions “evolving as expected,” Fan said RBC sees the Bank of Canada remaining on hold this week and for the rest of 2026.

The central bank will release updated forecasts for inflation and the economy alongside its interest rate decision on Wednesday.

This report by The Canadian Press was first published July 13, 2026.

Craig Lord, The Canadian Press