Easing inflation and improving growth data point to another BoC pause, RBC Economics says
The Bank of Canada is broadly expected to keep its overnight rate at 2.25% at Wednesday's July 15 policy announcement — a sixth consecutive pause following 50 basis points of cuts in September and October 2025, according to analysis from RBC Economics.
Nathan Janzen, assistant chief economist at RBC, and Claire Fan, senior economist at RBC, say the two principal risks that had kept the central bank's options open have both receded meaningfully.
They note that both concerns "have broadly eased over the last month to help solidify expectations for the central bank to remain in a wait and see mode for now."
Earlier in 2026, the BoC flagged a two-sided risk profile: the possibility of rate cuts if growth disappointed more sharply than forecast, and potential hikes if energy prices from the Iran conflict drove a sustained, generalized consumer price shock. In recent weeks, neither scenario has materialized.
Inflation concerns retreat
Higher oil prices stemming from restricted traffic through the Strait of Hormuz have weighed on household budgets, but the shock has not spread broadly across the consumer spending basket.
The BoC's Business Outlook Survey, conducted when crude was near recent peaks in May 2026, showed businesses' longer-run inflation expectations still well-anchored.
Core inflation measures have since moved down to around 2%, consistent with the Bank's target, and crude prices have pulled back somewhat, further reducing pressure on the BoC to act.
Canada's annual inflation rate climbed to 3.2% in May 2026, its highest reading since December 2023, but the acceleration was driven predominantly by gasoline, not by broad-based domestic pressures.
Andrew Hencic, director and senior economist at TD Economics, signalled the same expectation following the June 10 hold.
"Given the competing forces on inflation, we expect the Bank of Canada to stay on hold through the balance of the year," Hencic said.
Growth and labour market steadying
Canada's first-quarter gross domestic product contracted, a weaker-than-anticipated reading, but more recent data has shifted the picture.
Janzen and Fan wrote that "monthly GDP data so far is pointing to stronger growth in Q2," with Statistics Canada's advance estimate showing a 0.1% increase in real GDP in May 2026 after a 0.5% rise in April.
On that trajectory, second-quarter growth is tracking an annualized rebound of approximately 2%, according to RBC's projections.
The labour market picture has also improved. "Labour markets showed more signs of steadying in May and June after job losses earlier in the year," the economists wrote, adding that "our tracking of consumer spending has remained resilient."
Housing, too, has offered a positive signal: "Housing markets have firmed in cities like Toronto and Vancouver that significantly underperformed previously."
On the trade front, the Canada–United States–Mexico Agreement (CUSMA) continues to shield the majority of Canadian exports from US tariffs, even after Washington declined to confirm an extension of the deal's 2036 expiry date.
Broader US tariff rates have also edged lower, easing one of the more significant external headwinds to domestic growth.
Janzen and Fan's overall assessment is direct: "We continue to expect a soft but gradually improving Canadian per-person growth backdrop will leave the BoC on hold through 2026."
Wednesday's announcement will also be accompanied by the Bank's next Monetary Policy Report, the most consequential rate policy update of the summer for mortgage professionals advising borrowers.
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