The Bank of Canada held its overnight rate at 2.25 per cent Wednesday, the sixth consecutive hold and a decision every one of the 36 economists surveyed by Reuters had expected. Inside the same Monetary Policy Report, the Bank raised its 2026 inflation forecast to 2.5 per cent from 2.3 per cent in April and cut its 2026 growth forecast to 0.7 per cent from 1.2 per cent. A worse inflation number and a worse growth number would normally read as two reasons for caution. Governor Tiff Macklem instead delivered his most upbeat remarks of the year, telling reporters that after stalling over the past year, economic growth looks to have resumed in Canada.
The two revisions are not actually in tension, and understanding why is the planning-relevant part of Wednesday's decision. The inflation forecast moved because of a single, identifiable channel: gasoline. Headline CPI reached 3.2 per cent in May, the fastest pace since December 2023, almost entirely because of Middle East conflict driven energy prices. The core measures the Bank tracks directly, the trimmed mean and median, held at 2 per cent and 2.1 per cent respectively in May, essentially unchanged. The growth forecast moved for an unrelated reason: a genuinely weak first quarter, when the same conflict and uncertainty around US trade policy stalled activity outright. The Bank now believes that weakness was concentrated in early 2026 rather than reflecting a deeper deterioration, and it is treating the two developments as separate problems requiring separate judgment.
Why a Weak Quarter and a Hot Month Both Read as Good News
Canadian headline inflation spent most of the past year drifting in a band between 1.7 and 2.4 per cent before breaking sharply higher this spring, and the shape of that break is the clearest evidence for the Bank's split diagnosis.
Core measures the Bank of Canada tracks directly, the trimmed mean and median, stayed close to 2 per cent through May even as the headline figure climbed, a gap not visible in the all-items series shown.
The February trough and the subsequent climb to 3.2 per cent by May trace almost exactly onto the conflict's escalation and its effect on gasoline prices, while the core measures the Bank actually targets barely moved. That is the technical basis for Macklem's comfort: the headline number is elevated for a reason the Bank can identify and, it believes, expects to fade once oil prices stabilize.
The Labour Market Gave the Bank Something to Point To
June's Labour Force Survey, released five days before the rate decision and described by the Bank as its last major data point beforehand, supported the more confident tone. Employment rose 18,000 and the unemployment rate fell to 6.5 per cent from 6.6 per cent, tying its lowest level since early 2026. Average hourly wages rose 3.3 per cent year over year, up from 3.0 per cent in May. The gains were not uniform: manufacturing lost 17,000 jobs in June and has shed 61,000 since January 2025 under sustained tariff pressure, while accommodation, food services, and youth employment carried the headline number. That unevenness is itself consistent with the Bank's framing of a domestic recovery that is real but still narrow.
The Line Macklem Drew
Macklem was explicit about where the Bank's patience ends. He said the Bank has been looking through the direct effects of higher oil prices on inflation, but that the longer they remain elevated, the bigger the risk they spill over into other goods and services, and that the Bank will not let higher oil prices become persistent inflation. He confirmed that a series of rate hikes remains on the table if gasoline prices move up again and stay elevated. The distinction advisors should carry forward is that Wednesday's hold reflects confidence in the growth story and tolerance, not indifference, for the inflation story. The next scheduled decision is September 2, with the next full Monetary Policy Report due October 28. Both dates now carry more weight than a routine hold would normally suggest.