Bank of Canada holds interest rate at 2.25 per cent – June 9, 2026

Good morning everyone. We're very pleased to be here together to discuss today's monetary policy decision. Today the Governing Council maintained the policy interest rate at 2 and 1/4%. Since our April decision, the economic impact of the ongoing conflict in the Middle East has increased. Higher energy prices and disruptions in global supply chains are weighing on global growth and pushing up inflation worldwide. At the same time, the US administration continues to propose new tariffs and trade policies and certainty remains elevated. Against this backdrop, the Canadian economy has remained soft and inflation has increased. Monetary policy continues to be focused on ensuring that higher energy prices do not turn into persistent inflation while helping the economy adjust to headwinds. We are committed to keeping inflation low and stable over time.

So, let me explain what we're seeing since the April monetary policy report and the implications for monetary policy. The conflict in the Middle East is slowing economic activity in the Gulf region and in many oil-importing countries and sending inflation higher worldwide. At the same time, AI-related investment is boosting growth in the United States and some Asian economies and equity prices have been buoyant. In Canada, GDP edged down 0.1% in the first quarter, weaker than expected at the time of the April report. Consumer spending grew by 1.4% but there was an unexpected pullback in government spending. Housing activity also declined and business investment remained weak. While the labor market strengthened in May and the unemployment rate fell to 6.6%, there's been a lot of volatility in the monthly job numbers. When you look through the bumpiness, employment in Canada is little changed since the start of the year and the unemployment rate has been fluctuating in the 6.5 to 7% range. Recent data suggests GDP growth will resume in the second quarter with continued increases in consumer spending and more stability in the housing market. Even with some rebound in GDP growth, we expect the economy to remain in excess supply. As anticipated, CPI inflation rose in April reaching 2.8%. The increase reflects energy prices, both higher global oil prices and the impact of the elimination of the Canadian consumer carbon tax falling out of the 12-month rate of inflation. So far, there's been limited evidence of broad-based pass-through of higher energy prices to other consumer prices. Measures of core inflation have moved down to around 2% and the share of CPI components growing above 3% is close to its historical average. Food price inflation moderated but remains high and shelter inflation continued to slow. With the conflict in the Middle East persisting, oil prices have remained elevated. Market expectations have shifted up since April and oil prices are roughly $10 a barrel higher than we assumed in the MPR. Based on this, we expect CPI inflation to hover close to 3% in coming months before easing gradually towards 2%. We'll be watching closely for evidence of a broadening in price pressures. The bank is committed to keeping inflation close to the 2% target over time. At our meeting this week, we decided to maintain the policy rate at 2 and a quarter percent. Governing Council agreed to look through the war's near-term impact on inflation, but if energy prices stay high, we will not let their effects become broad-based persistent inflation.

Economic weakness combined with rising inflation is a dilemma for monetary policy. Raising rates to dampen inflation could further slow the economy. Easing rates to support growth increases the risk that higher inflation becomes persistent. For now, holding the policy rate unchanged balances those risks. However, uncertainty is unusually elevated and the risk could shift. Monetary policy may need to be nimble. If the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth. Alternatively, if the conflict in the Middle East continues and higher energy prices start leading to ongoing generalized inflation, monetary policy may have more work to do. There may be a need for consecutive increases in the policy rate. Of course, these are not the only possible scenarios. The Canadian economy is working through a period of structural change, shifting trade relationships, the adoption of AI, and changes in demographics complicate the assessment of the economy. We're going to be watching all these developments closely and assessing their implications for growth and inflation. And as the outlook evolves, we stand ready to respond as needed. The bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. And with that, the two of us would be very pleased to take your questions.

David, it's less about a timeline, and it's more about the conditions. So, what are the things that we're going to be looking at? What we don't want to see is the big rise in energy prices turn into generalized inflation. And then we don't want that to become persistent inflation. So, how do we assess generalized? Right now we're seeing very limited evidence of pass-through of higher energy prices to other goods and services. Obviously, you can see some effects. You're seeing surcharges on airlines, for example. But broadly you're not seeing much pass-through. How do we assess that? Well, core inflation, which strips out the increase in energy prices, it's actually ticked down. If you look at the proportion of CPI components that are rising faster than 3%, it's close to its historical average. So, so far there's very limited evidence. But, if we started to see more evidence that higher energy prices were passing through to other goods and services, that would certainly get our attention. That would be a source of concern. And then, yes, the other thing you look for is persistence. And there, things like looking at inflation expectations. Naturally, with higher inflation, near-term inflation expectations have gone up. Inflation has gone up. So, of course, near-term inflation expectations have gone up. So far we're seeing longer-term, medium-term inflation expectations are remaining well anchored. But, if you started to see those drifting up, that would be a sign that inflation is becoming entrenched and the persistence is likely to go up. So, those are really the things we're watching for. It's less about the timeline, it's more about the conditions.

Well, that's certainly part of it. I think, just to back up for a minute, part of it is that we started with 2% inflation. Inflation until the war in the Middle East was running close to 2% for roughly a year and a half. So, we had inflation back to target. It has moved up, but it started lower, so it's still lower than the United States. There are some other factors pushing inflation up in the US. There's no question US tariffs have boosted US inflation. Now, that effect's probably going to start to wane unless they take new trade actions. And as you mentioned, yes, the Canadian economy is soft. It's weak. And that tends to put a downward pressure on prices generally. We have not seen any evidence yet of broad-based pass-through of higher energy prices to other goods and services.

Well, I'll dig in a little bit on the GDP number in a minute, but big picture, not a great deal really has changed since our last decision. The war in the Middle East is still ongoing. Uncertainty about US trade policy remains. The review of CUSMA is ongoing. And the data overall has not been big surprises. Yes, first quarter GDP was quite a bit weaker than we thought. But if you look under the hood, consumption grew 1.4%. You're still seeing consumer spending expanding. The miss was largely because there was an unexpected pullback in government spending. It can be difficult translating, government spending can be choppy one quarter to the next. We don't think there's any sort of ongoing shift in government spending. The government have announced their plans. We built those plans into our projection. Figuring out exactly how that plays out quarter to quarter is difficult. You look at Q1, consumption was fairly healthy. Housing pulled, certainly housing declined. Business investment was soft. And then trade and inventories were largely awash. That gave you a very slightly negative quarter. We do think growth will resume in the second quarter. We expect to see continued expansion of consumer spending. We think there'll be a little more stability in the housing market so it won't be subtracting from growth. So we do expect growth to resume. And if you look at the labor market, month-to-month there's been a lot of volatility in employment. Last month was up strongly. If you look over the last 6 months, basically, employment is roughly unchanged. The unemployment rate's been fluctuating in a range of 6 1/2 to 7%. So, that hasn't really changed since last time.

Look, the short answer to that question is, based on the data we've seen to date, the economy is weak, but it is not clearly in recession. So, let me just unpack that a bit for you. If you look at how the economy has evolved over the last year, GDP is roughly flat over the last 12 months. If you look at the labor market, it's up a little bit over the last 12 months, essentially flat over the last 6 months. As I mentioned, there's been a lot of volatility month to month, quarter to quarter. But, when you look through the bumps, the economy hasn't really grown in the last year, but it hasn't shrunk either. So, economists typically define a recession as a significant, broad-based decline in economic activity that lasts for more than one quarter. And if you look at the data we've got, based on that definition, the economy is weak, but it's not clearly in recession. If you look at the first quarter, it was just barely negative after the decline in the fourth quarter of last year. If you look across industries, what you see is that in the first quarter, more than half of industries actually grew, expanded on a year-over-year basis. And as I mentioned, the unemployment rate's been relatively stable in the 6.5% to 7% range. So, so far, we have not seen a significant broad-based decline in economic activity. So, recession is not the word I would use. I would describe the economy as weak. It hasn't grown really in the last year. There's excess supply in the economy, there's slack in the labor market. We're certainly assessing that closely and, as we indicated, we're prepared to respond as needed.

Yes, as you've indicated, what all parties are indicating is that discussions are ongoing, negotiations are ongoing. They're probably going to play out over a number of months. So, yes, that uncertainty will continue to weigh on the economy. I think the good news is, with the exception of the hard-hit sectors, the vast majority of goods that are traded with the United States continue to be traded tariff-free. I think businesses are starting to recognize that our trade relationship with the United States is changed. And that uncertainty, even with a deal, I don't think you can be certain about anything. So, businesses are having to adjust to that. You're seeing they're adjusting to that uncertainty. They are diversifying their trade. They're also to some extent just getting used to the new reality and getting on with business. Maybe if you look at our last business outlook survey, you could see that in the responses of businesses. Even though the uncertainty hadn't gone away, they were starting to make investment plans. I'm not saying the uncertainty wasn't weighing on them, but they were starting to sort of recognize, 'Okay, we can't just sit on our hands forever. This isn't going away. We've got a business to run. We've got to manage in an environment of uncertainty.' And you're starting to see businesses get on with it. So, we are expecting to see, at least in our last projection as senior deputy governor mentioned, we'll be updating that in our July projection, and we'll be getting a new business outlook survey as well. So, we'll see how things are evolving, but based on the last one, we have some modest pickup in business investment going forward after a lot of weakness.

Well, look, the war in the Middle East is still going on. There's no clear resolution in sight. We don't know what that resolution would look like. There's been damage. So, yes, this is probably, the fact that the energy price futures curve has shifted up, I think, is reflecting that. And look, the longer this goes, the higher energy prices are, the longer they're higher, the bigger is the risk that that starts to pass through to other goods and services, and the more likely that it becomes that then we need to respond. So that is certainly a concern, and we've been very clear. We're not going to let war in the Middle East become an inflation problem here in Canada. But that's not the only thing going on. There is a lot going on. We've been talking about trade, the Canadian economy's going through a period of restructuring, adoption of AI, lower population growth. So, we got to look at all these things together. And we'll be updating our forecasts and taking our decisions based on our assessment of where inflation's going, how the economy's doing.

Both is the short answer. That's the reason we're talking about both of them. Look, clearly, the war in the Middle East, it's ongoing. The longer it goes, the higher energy prices are, and in particular, the longer they stay high, that risks a one-off increase in energy prices becoming more persistent inflation. That's what we can't let happen. We're committed to getting inflation back to our 2% target over time. We're prepared to look through the near-term impacts or what you might call the first-round impacts, but when you start to see second-round impacts, you start to see more persistent, that's certainly a signal that monetary policy has more work to do. But yes, look, trade remains very uncertain. The discussions and negotiations remain ongoing. Hopefully, that lands well. And the Canadian economy can, we can restore more certainty in our relationship with the United States. You can see, I think if that happens, you'll see more strength in exports, more strength in investment. That'll be good to the economy. But look, we have no influence on that outcome. We're going to take things as they come. There are risks on both sides. They're both important.

So, look, our base case on CUSMA is that the negotiations continue to play out for a number of months. So, we haven't built in a big change one way or the other there in terms of our outlook. In terms of what is the evidence for the second quarter? We do have some higher frequency indicators for the second quarter, which can give you some advanced perspective on where it may land. If you look at things, there's a flash GDP estimate for Stats Can. That was fairly positive for the first month of the quarter. We have some higher frequency data for consumption, for housing. Consumption so far looks like it's holding up, consumption growth, and housing, which did decline in the last quarter, looks like it's more stable. I don't think it's going to be a big contributor to growth based on the high frequency data we have so far. But based on that data, looks like it's stabilizing, so shouldn't subtract from growth. Yes, look, I'll be the first one to admit that although we're actually well into the second quarter, we don't have that much data yet. There's always uncertainty. We've seen a lot of volatility in the month-to-month data. But when you look at our surveys, you look at the high frequency data we have, we do think the Canadian economy is poised to return to growth in the second quarter.

Well, first of all, let me clarify how we think about the 1 to 3% range. First of all, the range, our target is for total CPI inflation and the range, it is the 2% midpoint of a 1 to 3% range. You shouldn't think of the range as sort of a hard boundary. You should think of the range really more as a way to try to help explain to people what is kind of the normal variation in inflation. So, I mean, if you look over history, at least pre-COVID, total CPI inflation was within the 1 to 3% range 80% of the time. Obviously, we have a 2% target. We can't literally hit 2% every month, but 80% of the time it's bouncing around in the 1 to 3% range and I think as long as it's in that range, well, it's a pretty normal state of affairs. Occasionally, there are big shocks that can push it outside of the range. And it's on us to explain, okay, why is it outside of the range and what are we going to do to get it back into the range? So, we use core inflation really more, especially in this context, as a tool to help us understand how generalized price increases are. If the only reason inflation goes up is because of one price, higher oil prices, higher gasoline prices, or a small number of prices related to energy, that's more of a relative price shock, and it's not really inflation. So, it tends to be something we would look through. We tend to look through the first round effects, particularly when there's some weakness in the economy, which reduces the risk that it's going to get passed through to other goods and services. If we start to see core inflation drift up, because higher energy prices are spreading, that is certainly something that would get our attention because that would suggest that CPI inflation is not going to come down to the target. And we might have to take some action to get it to come down to the target. So, I hope that helps you think about the role of the band.

I hope we all have a good summer. We'll see you in July.