Inflation remains a key concern for the central bank, with headline inflation having risen above three per cent. The bank’s projection, however, suggests that inflation will ease to about 2.5 per cent in the second half of 2026 before reaching the 2 per cent target by early 2027. The conflict in the Middle East remains a significant risk factor, as about 20 per cent of the world’s oil transits through the Strait of Hormuz, and commercial traffic through the waterway has slowed. The bank has indicated that it would not overreact to energy price inflation caused by the conflict but would consider raising rates if elevated oil prices were to bleed into other parts of the economy.
The Bank of Canada has also highlighted the importance of trade relationships in shaping the economic outlook. Prime Minister Mark Carney has warned that U.S. trade will not return to a pre-Trump normal and is pushing Canada to aggressively pursue new markets overseas. Macklem noted that there are indications this is happening, pointing to the aluminum sector, which is facing punishing U.S. tariffs, where businesses are finding new customers in Europe. The survival of the United States-Mexico-Canada Agreement has meant that roughly 85 per cent of U.S.-Canada trade has remained tariff-free, providing some stability amid the uncertainty.
Looking ahead, the central bank’s forecast for GDP growth has been revised downward, with the bank lowering its estimate for 2026 growth to 0.7 per cent from 1.2 per cent in its April projection. The revision reflects the unexpected GDP contraction in the first quarter of the year, which was dragged down by temporary factors including an unexpected decline in government spending, a fall in motor vehicle production, and a sudden drop in oil and gas investment. Despite these challenges, the Bank of Canada remains cautiously optimistic about the economic outlook, with the expectation that growth will continue to improve in the second half of the year.
