CA BOC Monetary Policy Report

The Canadian economy has been adjusting to US tariffs and continued uncertainty about the review of the Canada‑United States‑Mexico Agreement, as well as slower population growth. Business investment has been roughly flat, exports and housing activity have declined and economic growth has been uneven. As a result, the level of gross domestic product was roughly unchanged from the first quarter of 2025 to the first quarter of 2026. The unemployment rate has generally fluctuated between 6½% and 7%, pointing to excess supply in the economy. Consumer price index inflation in Canada was close to the 2% target for more than a year and a half until the war in the Middle East began. The hostilities caused global oil prices to spike, pushing up gasoline prices. Inflation rose to 3.2% in May. However, inflation excluding gasoline, as well as measures of core inflation, stayed close to 2%. This suggests that, so far, spillovers to the prices of other goods and services remain contained. Canadian businesses are adapting to elevated geopolitical uncertainty stemming from US trade policy and developments in the Middle East. Despite some volatility, recent data suggest that the economy is evolving broadly in line with the outlook in the April Rep Bank of Canada sees 2026 growth at 0.7% (vs 1.2% in April MPR), sees 1.8% growth in 2027 (vs 1.6%), 1.8% in 2028 (vs 1.7%). BoC: Inflation to average 2.5% in 2026 (vs 2.3% in April), 2.0% in 2027 (vs 2.1%), 2.1% in 2028 (vs 2.0%). Just in | The Bank of Canada maintains its nominal neutral interest rate estimate at the midpoint of 2.25% to 3.25%, consistent with April's assessment.

Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our quarterly Monetary Policy Report and today’s decision. Governing Council maintained the policy interest rate at 2.25%. We have three key messages. First, after stalling over the past year, economic growth looks to have resumed in Canada. While US trade policy continues to be a headwind, consumers have been resilient and businesses are adapting. Second, inflation in Canada is poised to ease gradually provided global oil prices decline from elevated levels. Third, uncertainty remains elevated. The conflict in the Middle East has re-escalated in recent days and trade discussions with the United States are ongoing. Let me expand on the outlook, the risks and the implications for monetary policy. Global growth has been dented by the conflict in the Middle East, but with oil prices coming part way back down, growth is expected to recover. Equity markets have been buoyant, and credit spreads remain compressed. Canada’s GDP growth was flat over the past year as the economy adjusted to new tariffs, elevated uncertainty and slower population growth. The economy remains in excess supply. The labour market has been soft, with the unemployment rate hovering in a range of 6½% to 7%. GDP growth in the second quarter is estimated to have picked up to 2½%. While this rebound from the first quarter largely reflects the unwinding of temporary factors, sources of economic growth appear to be broadening. Recent indicators point to continue BoC: Uncertainty is still high. MACKLEM: DATA WE HAVE RECEIVED SINCE APRIL HAVE INCREASED OUR CONFIDENCE THAT THE ECONOMY IS WORKING ITS WAY THROUGH PERIOD OF GLOBAL UPHEAVAL MACKLEM: WE WILL NOT LET HIGHER OIL PRICES BECOME PERSISTENT INFLATION #OOTT

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. Canada’s economy is showing signs of improvement. Growth is picking up and inflation is projected to ease gradually from its recent spike. There are still important risks and uncertainties related to the war in the Middle East and US trade policy. Since the April Monetary Policy Report (MPR), global economic prospects have been dented by higher oil prices stemming from the Middle East conflict. At the same time, the build-out of artificial intelligence (AI) is supporting economic activity in a growing number of countries. Oil prices are still lower than their peak in April but the situation in the Middle East remains volatile. The path for global inflation is highly dependent on how the conflict unfolds. The US economy is growing at about 2½%, mostly because of strong consumption and booming AI investment. China’s economy is expanding solidly thanks to robust exports. Economic activity in the euro area has been weighed down by high energy prices, but is expected to strengthen in the second half of the year if energy prices come down as anticipated. The Bank projects global GDP growth will slow to 2¾% in 2026, mostly because of the effects of the Middle East conflict, and recover to around 3¼% in 2027 and 2028. Bank of Canada Governor Macklem: Inflation is poised to ease gradually, provided global oil prices decline, prepared remarks show. BoC: Near-term inflation expectations are sensitive to changes in gasoline prices, but longer-term inflation expectations remain well anchored. Bank Of Canada drops reference to consecutive hikes. BOC ALSO DROPS REFERENCE TO CUT

BoC's Gov. Macklem: Wouldn't characterise today's comments as forward guidance. BoC's Gov. Macklem: It is useful to convey how we would handle various potential outcomes.

BoC's Senior Dep. Gov. Rogers: Over the longer term, trade tensions are a bigger threat to the economy than higher oil prices.

BoC's Gov. Macklem: If energy prices stay higher for longer, there could well be a need to raise the policy rate. BoC's Gov. Macklem: AI is not having a big effect on our policy decisions right now. BoC’s Macklem: No Set Timeline For Possibly Raising Rates BoC's Gov. Macklem: There is no risk-free path for the policy interest rate. BoC's Gov. Macklem: If we'd raised the rate now and oil prices had then gone down, by the time the rate was impacting the economy, we would wish we hadn't raised the rate.