Bank of Canada sees economic recovery despite tariff and Middle East risks

The Bank of Canada has left its key policy interest rate unchanged at 2.25 percent, saying the economy is expected to recover despite weak growth over the past 18 months.

In its latest Monetary Policy Report, the central bank said Canada's gross domestic product was "roughly unchanged from the first quarter of 2025 to the first quarter of 2026", with growth falling short of its earlier forecasts.

The bank said economic activity rebounded during the second quarter as exports and residential investment improved and it now expects the economy to grow by just over one percent during the first half of 2026.

However, the Bank warned that uncertainty surrounding US tariffs, the review of the Canada-US-Mexico Agreement, and the conflict in the Middle East could weigh on future growth and inflation.

Speaking at a news conference, Bank of Canada Governor Tiff Macklem said: “(Companies) are finding ways to work with their clients. They’re reconfiguring their supply chains and they’re getting on with business.”

“If you get more exports, ... you’ll probably get more business investment”, he added.

Macklem also said Canadian consumers had remained resilient despite slow population growth.

The Bank noted that inflation excluding petrol remains close to two percent, while unemployment has generally remained between 6.5 percent and seven percent, suggesting there is still spare capacity in the economy.