Bank of Canada preview: On hold with weak activity and core on target

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Bank of Canada preview: On hold with weak activity and core on target

Econ: BoC likely on hold through year-end

We expect the BoC to keep its policy rate unchanged at 2.25% on July 15 and through

year-end. Underlying activity remains soft despite signs of recovery in 2Q26, while

recent labor market improvement could prove temporary, partly reflecting the FIFA

World Cup. Core inflation remains close to target and long-term inflation expectations

remain well anchored, arguing against further tightening. While the BoC is likely to

acknowledge the recent rebound in activity and upside risks from external developments,

we expect policymakers to maintain a cautious tone and keep the bar for rate hikes high.

USMCA: trade uncertainty is here to stay

Recent developments have done little to reduce uncertainty around Canada’s trade

relationship with the US. Following the July 1 USMCA review, the agreement remains in

force but has shifted to an annual review process, leaving future trade arrangements

subject to continued negotiations. Canada and Mexico supported an extension, but the

US did not, as it continues to push for stricter rules of origin, greater regional content

requirements, and the retention of tariffs on key sectors such as autos, steel, and

aluminum. As a result, trade policy uncertainty is likely to remain elevated, even without

an immediate disruption to North American trade. Meanwhile, tensions in the Middle

East have moderated but continue to cloud the global outlook. Although our baseline

assumes lower oil prices ahead, the situation remains volatile and difficult to predict,

leaving room for renewed energy-price volatility.

Activity: some improvement at the margin

Canada entered a technical recession in 1Q26, with GDP falling -0.1% qoq saar after a -