BoC set to keep interest rates steady despite sticky inflation

The Bank of Canada (BoC) is set to maintain its policy rate at 2.25% during its upcoming monetary policy meeting, according to widely anticipated expectations. This marks the seventh consecutive meeting with the central bank holding steady, with no rate adjustments expected. In July, the BoC also opted to keep its policy rate unchanged at 2.25%, as expected.

While the central bank acknowledged that rising oil prices could necessitate consecutive rate hikes, Governor Tiff Macklem emphasized that this scenario does not currently represent the bank's base case.

Macklem further revised the BoC's Canadian growth forecast for 2026 downwards, now anticipating annualised GDP growth of 0.7% compared to the previously projected 1.2%. However, the bank's near-term outlook has improved, with the organization now expecting Q2 growth to reach 2.5%, up from the earlier estimate of 1.5%. This improvement could potentially be sustained, although uncertainty remains regarding the durability of the recovery.

Economic growth is projected to strengthen to 1.8% in both 2027 and 2028, despite a persistent output gap, indicating excess capacity remains in place.

Inflation has also been revised higher by the BoC, with the central bank now forecasting a 2.5% inflation rate for 2026, up from 2.3% in the previous projection, before easing to 2% in 2027 and dipping to 2.1% in 2028. Oil prices continue to pose the primary upside risk to this forecast. Macklem warned that a sustained rise in energy prices could spill over into broader inflation, potentially triggering consecutive rate hikes. The bank remains less inclined to respond mechanically to a temporary oil price spike.

Inflation measures have generally exceeded the BoC's target, with the headline CPI rising by 3.0% year-on-year in July, surpassing the previous month's 2.8% print. The BoC's core inflation rate also increased to 2.3% from a year earlier. When the BoC releases its monetary policy decision on Wednesday at 13:45 GMT, followed by Governor Tiff Macklem's press conference at 14:30 GMT, market participants anticipate the central bank to maintain its current stance. Analysts project a slight tightening of just over 2 basis points by the end of 2026.