Tiff Macklem speaks to reporters after Bank of Canada holds key rate at 2.25%

Thank you, Paul, and good morning to everyone who is joining us. The senior deputy governor, Carolyn Rogers, and I are very pleased to be with you this morning to discuss our monetary policy report and our monetary policy decision. The governing council has maintained the policy interest rate at 2 and a quarter percent. 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, provided global oil prices decline from elevated levels. And third, uncertainty remains high. The conflict in the Middle East has re-escalated in recent days, and trade discussions with the United States remain ongoing.

Canada politrol. So let me now expand on the outlook, the risks and the implications for monetary policy.

Growth has been dented by the conflict in global growth has been dented by the conflict in the Middle East. But with oil prices coming partway 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 labor market has been soft with the unemployment rate hovering in a range of 6 and a half to 7%. GDP growth in the second quarter is estimated to have picked up to 2 and a half percent. 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 continued solid consumer spending. Housing activity, which has been weak, looks to be stabilizing. Export growth has resumed and is expected to continue to strengthen, albeit along a lower path. Business investment is picking up, boosted in the near term by the oil and gas sector. And although the Canada US Mexico agreement is now subject to annual reviews, more businesses report they are finding ways to navigate through this uncertainty. Government spending also contributes to higher economic activity over the projection. Overall, our growth outlook is similar to our April forecast, but the data we have received since April have increased our confidence that the economy is indeed working through this period of global upheaval. Following GDP growth of 0.7% in 2026, the economy is projected to grow by 1.8% in both 2027 and 2028. As the recovery proceeds, economic slack will be gradually absorbed.

CPI inflation rose to 3.2% in May, mainly because of the higher gasoline prices linked to the conflict in the Middle East. Excluding gasoline, inflation was 2.2% and measures of core inflation have remained close to 2%. So far, we are not seeing broad spillovers of energy prices to other goods and services. Near-term inflation expectations are sensitive to changes in gasoline prices, but longer-term inflation expectations remain well anchored. War related cost pressures are still working their way through some consumer prices, but they are being offset by downward pressure from other prices from continued economic slack. In addition, the recent depreciation of the Canadian dollar will make our exports more competitive, but it also increases the costs of our imports. Inflation is expected to stay elevated in June and then ease gradually in the coming months, returning to the 2% target in early 2027. I do want to underline that this forecast is highly dependent on the path for global oil prices and gasoline prices. It assumes oil prices come down and stabilize between 70 to $75 US per barrel. Since finalizing our forecast on Friday, the futures curve for oil prices has already moved higher. We have been looking through the direct effects of higher oil prices on inflation, but the longer they remain elevated, the bigger the risk they spill over to other goods and services. As we have said before, we will not let higher oil prices become persistent inflation.

The two biggest risks to the projection are still the conflict in the Middle East and our trade relationship with the United States. There are also domestic risks to our inflation outlook. As inflation comes down, there is a risk that it gets stuck above the 2% target. If cost increases and their pass through are larger than expected or the economy recovers faster than expected, inflationary pressures will increase. On the other hand, there is a risk that the second quarter pick up in growth is not sustained. The recovery in exports could stall, which would likely weigh on business investment and hiring. A weaker economy would mean more downward pressure on inflation. Based on the MPR projection published today, governing council judges the current policy rate remains appropriate to sustain the economic recovery and bring inflation back to the 2% target. However, uncertainty is still high. Governing council will continue to assess the strength of the Canadian economy and the outlook for inflation and is prepared to adjust monetary policy as needed. The bank is committed to maintaining Canadians confidence in price stability through this period of global upheaval. And with that, the senior deputy governor and I will be very pleased to take your questions.

There you know since our last report in April there have been quite a number of economic indicators and certainly what they are suggesting is that the economy is now expanding and the signs as that data have come in have become clearer. For the second quarter we are estimating growth of about 2 and a half percent. So where is that coming from? Well a few sources. First of all, we have seen continued resilience on behalf of Canadian households, consumers. Consumer spending has remained pretty solid through this. The housing market had been weak. It had actually been contracting. It looks like it is stabilizing. So it is probably not going to add a lot to growth, but it is not going to be subtracting from growth. I think where we are seeing a bit more momentum is in exports. Exports, as you know, have adjusted to US tariffs. And they now look to be growing again. Yes, they are growing along a lower path than what they were on, but they are getting back to growth. When we talk to businesses, what we are hearing is they are adapting to this uncertainty. The other thing is the US economy is strong. That is creating strong foreign demand for our exports. US orders, they are starting to come back. Businesses, in some cases like aluminum, are finding new markets in Europe for example. So we are seeing a certain adaptation and with more strength in exports we think there will be a pickup in business investment. Certainly we expect to see some boost in the near-term in business investment coming out of the oil and gas sector. While lower oil prices are encouraging more investment in oil and gas. So, you put those things together, the second quarter is looking we already have a fair amount of data for the second quarter that is looking pretty solid. I think the thing that we are going to be assessing going forward is how sustainable is that pickup? We think when we talk to companies, when we look at the sort of change in momentum, we do think it is sustainable, but yes there is a risk growth particularly exports could stall going forward. If exports stall, I think investment will stall, hiring will slow down. So there are some risks, but increasingly the economy is looking like it is in expansion.

The short answer to that question is yes. But let me emphasize a couple things. If you go back to our April report, we outlined a scenario where oil prices were high and they stayed high. And what we indicated is in that scenario, you know if that happens, the likelihood that higher oil prices start to pass through to prices of other goods and services, inflation becomes more generalized and starts to become more persistent. And we indicated in that scenario yes we would likely need at least consecutive hikes in interest rates to get inflation back to our target. So where are we today? Well, today oil prices are lower than their peaks in April. Obviously in the last week you have seen them back up considerably. They are about halfway back to where they were. And look, let us be frank, the situation in the Middle East remains very volatile. It looks like it is a long way from being resolved. And so, yes, if oil prices go higher and they remain higher, there may well still be a need for consecutive hikes. I do want to stress though that is not our base case. It was not our base case in April. It is not our base case now. Our base case now is that oil prices will gradually ease. Inflation in Canada will also gradually ease. But it is a risk. And then the last thing I would just underline is it is not the only risk. For example in my response to the previous question, we are more encouraged that growth is picking up. But there are questions about how sustainable that pickup is and if exports stall, if investment weakens again, if housing slows, there will be more excess supply in the economy, more downward pressure on inflation. So there are risks on both sides and we landed today where our best judgment is that where we are now looks appropriate, but we underlined uncertainty is high and we are prepared to adjust monetary policy as needed.

Well, you described our outlook pretty well. I am not sure how much more I can add really. Look, I am not going to give you, I am not going to handicap the next decision. We are going to take our decisions one at a time. I think what I would emphasize there is monetary policy has been facing this dilemma as you suggested. Inflation is high. It is above our target. It is actually a little bit outside the 1 to 3 band. Growth has been weak. The economy has not really shrunk over the last year, but it has not grown either and there is considerable excess supply in the economy which means there is room for the economy to grow without creating inflationary pressures. The thing is you cannot at the same time raise rates to lower inflation and lower rates to raise growth. So there is a dilemma. What we are seeing relative to where we were is that if this forecast plays out, that dilemma will be resolving itself. As you said, growth will be picking up, inflation will be coming down. And in that sense, yes it is a fairly positive outlook. There are risks around that outlook which I have already talked about. The reality is that the world is an uncertain place and there is always some uncertainty about just how events will play through, how they will affect the Canadian economy, how quickly it is adapting, how quickly higher costs will get passed through. We will be watching all those things and as we have indicated, we are prepared to respond as needed.

Well, the short answer, Paul, is it has not been a major factor. The Canadian dollar has depreciated about a couple of cents since the last decision. We, as you know, do not target the Canadian dollar. Flexible exchange rates are an essential part of our monetary policy framework. It allows us to set interest rates in Canada for the needs of the Canadian economy. And as we mentioned in the report, you have seen some widening in government bond yield between Canada and the United States. I think that has weighed a bit on the Canadian dollar. As we highlighted in the report, a weaker Canadian dollar does make our exports a little more competitive. At the same time it does increase the costs of imports into Canada. We do not forecast the Canadian dollar. We have assumed a 71 cent dollar going forward in our forecast. So that effect is about two cents, which is a pretty small effect in our forecast. The boost to inflation would be pretty small and the impact on exports would be pretty small. It is not a major consideration in the forecast, but yes it is embedded in the forecast.

Well, these are major projects that are in the development stage. So they do not show up, it will take a long time before they show up in the hard economic data. Your question about confidence. It would be hard to discern any one project's effect on confidence measures from the survey data that we track. But I think what you could say is that the move up in optimism that we have in this outlook is affected overall by confidence and I think it would be reasonable to think that one of the things contributing to that is some of these larger project announcements.