BoC Reaction: More confidence in growth, but risks remain

Research evidence excerpt

BoC Reaction: More confidence in growth, but risks remain

IdeaM

Economics: More confidence in growth, but risks remain

balanced

Arunima Sinha, Mayank Phadke

The Bank of Canada held the overnight rate at 2.25%, as expected. The statement and

press conference struck a balanced tone: the Governing Council is more confident that

economic growth has resumed, but it continues to see meaningful risks on both sides of

the outlook. The Bank judged that the current rate "remains appropriate to sustain the

economic recovery and bring inflation back to the 2% target [...]", while retaining a

symmetric commitment to adjust policy if either growth or inflation deviates from the

projection.

At first glance, the Bank’s improved tone on growth appears at odds with the 50bps

downgrade to its 2026 annual GDP forecast, to an annual average of 0.7% from 1.2% in

April. The distinction is one of timing. First-quarter activity was substantially weaker than

the Bank had anticipated, but growth is estimated to have rebounded to 2.5% q/q saar in

the second quarter, compared with 1.5% in the April forecast. Growth in 2027 and 2028

was revised slightly higher, to a 1.8% annual average for both years. The message is

therefore that current momentum has improved.

(1) The growth tone is more optimistic, although the sustainability of the rebound is

yet to be determined. The Bank now sees the economy as expanding. Consumer spending

remains firm, housing activity appears to be stabilizing and business investment is picking

up, with the initial lead coming from oil and gas. The Bank also noted that businesses are

becoming more effective at operating through trade-policy uncertainty. Governor

Macklem noted in the press conference that incoming data have increased the Bank’s