In a widely expected move, the Bank of Canada held its key overnight lending rate, which impacts interest rates, steady for a fifth consecutive meeting at 2.25%. However, Tiff Macklem, the governor of the Bank of Canada, conceded that the Canadian economy is facing headwinds.
Canadian Economy Faces Growing Headwinds
According to the Bank of Canada, the Canadian economy is being hurt by the war in Iran. The conflict has juiced energy prices and disrupted global supply chains, weighing the global economy down and increasing inflation.
In April, Canada’s inflation rate increased to 2.8%, up from a 2.4% increase in March. The Bank of Canada blamed rising inflation on soaring energy and gasoline prices. Energy prices ripped 19.2% higher on an annual basis in April after rising just 3.9% in March.
While Macklem does not believe that the Canadian economy has slipped into a recession, the economy is experiencing flat growth, which doesn’t mean much to the average Canadian.
In the first quarter, Statistics Canada announced that gross domestic product (GDP) contracted 0.1% on an annualized basis. Analysts expected first-quarter GDP to advance 1.5%.
This comes after fourth-quarter 2025 GDP fell 0.2%. Two consecutive quarters of falling GDP is commonly referred to as a technical recession, although economists also consider factors such as employment, income, industrial production, and consumer spending when assessing the overall health of the economy.
With flat economic growth, whether we’re technically in a recession or not is of little consolation to Canadians. In addition to being the only economy in the G7 that is in a technical recession, Canada is also home to the worst household debt in the G7. Canadian households owe $1.80 in debt for every dollar of disposable income. Canada also has the second worst unemployment rate in the G7, at 6.6%.
Bank of Canada Interest Rate Forecast
While the Bank of Canada has held interest rates at 2.25% since October 2025, a level at which many believe rates will be held throughout the rest of the year, there’s actually an increasing possibility that the central bank could make a move, in either direction, when it meets again on September 2.
The Bank of Canada is just waiting on more data to balance out economic risks. Central banks increase interest rates when they want to cool an economy and bring inflation down, and they lower them when they want to energize a sluggish economy. The Canadian central bank is in the unenviable position of facing higher inflation and a weak economy.
By September, though, the Bank of Canada will have more concrete data on the state of the economy and the impact of the ongoing trade war with the U.S. and negotiations with the Canada-U.S.-Mexico Agreement (CUSMA). Macklem will also have a better understanding of whether inflation has moved beyond gasoline prices to impact other consumer prices.
If the first instance persists, the Bank of Canada could be forced to cut interest rates, if it’s the latter situation, the central bank could raise rates.
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