Bank of Canada: Oil-driven lift to inflation seen as temporary; rate held at 2.25%

The Bank of Canada’s newly published summary of deliberations shows policymakers held their benchmark interest rate steady this month because they judged an oil-driven rise in headline inflation to be temporary, while underlying price pressures remained more contained and the labor market stayed soft.

In the account of discussions leading to the July 15 decision, published Wednesday, the central bank said officials were weighing two competing risks: higher inflation tied to the war in the Middle East and rising oil prices, and weaker growth stemming from elevated U.S. trade policy uncertainty and tariffs. Even with those crosscurrents, Governing Council concluded the overnight rate should remain at 2.25%.

The Bank’s July materials showed why. Consumer price inflation rose to 3.2% in May, mainly because of higher gasoline prices. But excluding gasoline, inflation was 2.2%, much closer to the Bank’s 2% target. At the same time, unemployment stood at 6.5% in June, a sign of what the Bank described as soft labor market conditions, while the economy was still operating in excess supply, meaning overall demand remained below the economy’s productive capacity.

Officials also estimated second-quarter GDP growth at around 2.5%, suggesting activity had picked up after earlier weakness. Governor Tiff Macklem, who chairs the Bank of Canada’s Governing Council, said in his July 15 opening statement that the decision rested on three broad judgments: growth appears to have resumed, inflation should ease if oil prices come down, and uncertainty remains elevated.

The deliberations summary said policymakers saw the current rate setting as appropriate, “with growth expected to strengthen in the second half of the year and inflation projected to ease toward the 2% target by early 2027,” and therefore “decided to maintain the policy interest rate at 2¼%.” The Bank said it was “looking through” the direct effects of higher oil prices for now, though it cautioned that if oil stays high for longer, the risk of broader inflation spillovers would increase. In his July 15 remarks, Macklem underscored that point, saying, “As we have said before, we will not let higher oil prices become persistent inflation.”

The Bank’s July projection assumed oil prices would stabilize around US$70 to US$75 per barrel. It also noted that the futures curve moved higher after staff finalized the forecast, adding to upside inflation risk.

Wednesday’s publication was not a new policy move but a transparency document explaining the collective reasoning behind the July 15 decision. The Bank does not publish vote tallies in this format. On July 15, it held the target for the overnight rate at 2.25%, with the Bank Rate at 2.50% and the deposit rate at 2.20%. The overnight rate has been at 2.25% since the central bank cut it to that level on Oct. 29, 2025.

The policy decision meetings began July 7 and were chaired by Macklem. The Bank of Canada’s next scheduled overnight-rate announcement is Sept. 2, 2026.