No Rate Cut Yet: Bank of Canada Flags Upside Inflation Risks

The Bank of Canada left its benchmark interest rate unchanged at 2.25% on Wednesday, choosing to remain cautious as policymakers weigh slowing economic momentum against lingering inflation risks.

While the decision itself was widely expected, the central bank’s updated outlook revealed a more complex picture. Growth projections for the coming years were revised slightly higher, suggesting policymakers still see resilience in the broader economy despite softer activity in the near term. At the same time, inflation forecasts for 2026 were nudged upward, signaling that the path back to price stability may remain uneven.

Governor Tiff Macklem emphasized that policymakers are not following a predetermined course, stressing that future decisions will depend entirely on incoming economic data. He made clear that there is no “risk-free” path for monetary policy, reinforcing the bank’s flexible stance as global uncertainty continues to cloud the outlook.

One of the strongest messages from the central bank was that additional tightening has not been ruled out. Macklem said that if energy prices remain elevated for an extended period, borrowing costs may need to rise again to prevent inflation from becoming more deeply embedded in the economy.

At the same time, officials believe existing slack in the economy could help absorb some of the pressure from higher oil prices, limiting how quickly those costs are passed on to consumers. That balancing act appears to be at the center of the bank’s current strategy.

Another concern for policymakers is whether inflation expectations remain firmly anchored. Macklem acknowledged that households may now be more sensitive to rising prices than they were before the pandemic, making it harder for the central bank to confidently assume inflation will continue easing on its own.

Deputy Governor Carolyn Rogers also warned that trade tensions could become a more lasting threat to the Canadian economy than the recent rise in energy prices, particularly if global supply chains face renewed disruptions.

For financial markets, the decision reinforced a central message: the Bank of Canada is in no hurry to cut rates. Although the bank is not openly leaning toward another hike, officials are clearly unwilling to declare victory over inflation too soon.

For now, the central bank remains patient — but the door to further action remains open if inflation proves harder to contain than expected.