Canada Economic Perspectives: Bank of Canada becoming more optimistic

Research evidence excerpt

Canada Economic Perspectives: Bank of Canada becoming more optimistic

hinking on the USMCA here. We think that this will continue to be a factor in the

outlook for business confidence and in turn, investment, and were somewhat surprised

by the lack of discussion on this. Perhaps fatigue.

MPR: projections revised as expected, focus on second round inflation effects

The BoC revised down its expectations for growth this year (0.7% from 1.2%) and

added to growth in 2027 (1.8% from 1.6%) and 2028 (1.8% from 1.7%). We expect

growth of 1.0% this year and 1.9% next. They marked up projections for headline

inflation this year to 2.5% from 2.3% and took a tenth out of headline in CPI in 2027, to

2.0%. We have similar expectations for headline inflation of 2.6% this year and

2.0% next. Read the MPR here.

"In focus" in the July MPR was the potential pass-through of war-related supply chain

disruptions to consumer prices. The BoC noted the key channels through which the

conflict in the Middle East could affect "upstream costs:" supply chain bottlenecks,

elevated transportation costs, longer-term supply shortages, and additional short-term

demand pressures. They stated that the base-case assumes 1.4pp of additional inflation

in Q2 2026 from the direct impact of gasoline prices with 0.4pp added from second

round effects in Q1 2027. The BoC note the uncertainty in these estimates given the

potential that businesses could choose to not pass on cost increases to consumers either

because they believe the disruption could prove short-lived and they do not want to risk

market share or because weak demand limits corporate pricing power. See here.

Figure 1: Revisions broadly as expected

Revisions broadly as expected

Source: Bank of Canada, UBS

Canada Economic Perspectives 15 July 2026 ab 2