“Governing Council is continuing to look through the war’s near-term impact on headline inflation, but will not let higher energy prices become persistent inflation.”

-Rate decision statement, June 10, 2026

As we expected, the Bank of Canada held its policy rate at 2.25% this morning for the fifth consecutive meeting, repeating the same forward-looking statement (see above quote) from its previous meeting in April.  

The Bank is adopting a ‘wait and see’ posture in a tug of war between two competing forces:

1) The economy is struggling to find traction. First quarter GDP contracted slightly for the second straight quarter, disappointing the Bank’s expectation for a 1.5% annualized increase. This has ushered in a national conversation as to whether we’re in a recession. Despite meeting the ‘technical’ definition, the C.D. Howe Institute (the arbiter of such discussions) says it’s too early to call it a recession. The Bank of Canada simply said this morning that “economic activity in Canada has been weak.”

Recession or not, the economy needs to find its growth engine. Now that the population is declining, longstanding structural problems related to sluggish business investment and exports are becoming more apparent in the macro data. Yesterday’s export data  provides early signs that Q2 could be positive, something the Bank alluded to today.

The soft showing in Q1 means the economy likely has more ‘excess capacity’ than originally thought. Peering into the future, the Bank did not update its forecast today (that comes in July), but it did say “recent data suggests that growth will resume in the second quarter but, even with some rebound, the economy is expected to remain in excess supply.”  

2) Inflation is too high. Thanks to the Iran war, the inflation rate has shifted above target. The Bank said inflation is “expected to hover around 3% in the near term before easing gradually towards 2%.”

The Bank reiterated today that they will ‘see through’ a transitory increase in inflation from higher energy costs, but will not let these pressures persist.

Fortunately, inflation was cooperating ahead of the war, and the much-watched ‘core’ or underlying inflation readings have been trending lower (see chart). The Bank acknowledged this limited pass-through today: “So far, there has been limited evidence of broad-based pass-through of higher energy prices to other consumer prices.” This gives the Bank some wiggle room to wait before moving off the sidelines. They are keeping a close eye on inflation expectations which they say have increased in the near term, but remain “anchored” over the long term.  

Staying nimble

So where does that leave us? More waiting. Watching how long the Iran war lasts, its impact on inflation, and whether the economy actually turns the corner.

The Bank said that risks are “unusually elevated” and monetary policy will need to be “nimble.”

Our forecast remains unchanged—holding this year, and starting to raise rates next year to 2.75%—the midpoint of the neutral range (2.25-3.25%). This is based on expectations of economic recovery and temporary impacts of the war on inflation.

Risks are two-sided. The Bank said again, in an almost word-for-word repeat of April, that "consecutive rate hikes” may be needed if the energy price spike becomes “generalized.” But they also said new trade restrictions by the U.S. could lead to a cut.

Our view is that the Bank is likely more concerned about inflation risks than growth (despite recent disappointment on GDP figures), meaning risks are tilted to higher rates. We don’t see major breakthroughs on trade through the CUSMA review, but don’t see a major deterioration from the status quo on tariffs either.

For those hoping for a rate cut, be careful what you wish for. That would likely come from a deterioration in economic conditions, forcing the Bank to lean against recessionary risks.

The bottom line is that the Canadian economy is going to have to find its engine without rate support from the Bank. Keep your eye on whether investment trends finally move in Canada’s favour (business investment has been trending lower). That, in our view, is where the next leg of growth will need to come from.

Answer to the previous trivia question: Canada’s (seasonally adjusted) merchandise exports to the U.S. reached an all-time high of $57.1 billion in January 2025.

Today’s trivia question: When did Prime Minister Carney serve as the Governor of the Bank of Canada?