The Bank of Canada held its overnight lending rate at 2.25%, concluding that monetary policy remains appropriately calibrated as economic activity strengthens and inflation is expected to gradually converge with the central bank’s 2% objective.

Policymakers cautioned, however, that the outlook continues to be shaped by uncertainty surrounding geopolitical conflicts and US trade policy.

Globally, the Bank said higher oil prices stemming from the conflict in the Middle East have weakened growth prospects, while rapid investment in artificial intelligence continues to provide support for economic activity in major economies. It projects world GDP growth will slow to 2.75% in 2026 before recovering to about 3.25% over the following two years.

The US economy continues to expand on strong consumer demand and AI investment, China’s export sector remains resilient, and the euro area is expected to improve if energy prices decline.

For Canada, the Bank said economic conditions are improving after growth stalled because of tariffs, elevated uncertainty and slower population gains. It estimates second-quarter growth at 2.5% and forecasts GDP growth of 0.7% next year before accelerating to 1.8% in both 2027 and 2028.

Household spending remains resilient, exports and business investments are strengthening and housing activity is stabilizing, although labor market slack persists with unemployment holding at 6.5%.

The Bank stated that May’s increase in headline inflation to 3.2% was primarily due to higher gasoline prices, noting that underlying inflation remained close to 2%. It expects temporary energy-related price pressures to fade, allowing inflation to return to its target in early 2027, provided oil prices evolve as anticipated.

The Governing Council reiterated that it will continue assessing incoming data and stands ready to adjust policy to preserve price stability and support economic recovery.