OTTAWA--The Bank of Canada left its main interest rate unchanged on Wednesday at 2.25% after sharply downgrading its growth forecast for this year. Officials say they are increasingly confident that the economy is on the rebound, although uncertainty remains elevated about the outcome in the Middle East and U.S. trade policy.

The central bank added that it expects inflation to ease after peaking above 3%, with prices for non-energy goods mostly contained.

This marked the sixth consecutive decision in which the Bank of Canada kept its target for the overnight rate steady, as policymakers deal with an economy operating below potential and heightened inflation due to the Middle-East conflict. Wednesday's policy decision, though, offers some optimism that the squeeze stemming from U.S. trade policy is starting to ease, and that growth is in the early stages of a comeback after a year of stagnation.

All economists surveyed last week by The Wall Street Journal predicted no change in the policy rate. Most analysts anticipate that Canada's central bank will remain on the sidelines for the rest of the year. In its official statement, the Bank of Canada said officials concluded the policy rate at 2.25% is appropriate to sustain the recovery and bring inflation back toward 2%. "Uncertainty is still high," it said, adding it is prepared to adjust policy as needed.

The Bank of Canada revised its growth forecast, and now anticipates 0.7% expansion for 2026, down from its previous call for a 1.2% increase. It noted that the level of Canada's gross domestic product in the first quarter was roughly unchanged from the same period in 2025.

"After stalling over the past year, economic growth looks to have resumed in Canada," said Gov. Tiff Macklem, according to prepared remarks he is set to deliver at a press conference on Wednesday. "The data we have received since April have increased our confidence that the economy is indeed working its way through this period of global upheaval."

Canada's economy contracted for two straight quarters, and in three of the last four. However, neither the central bank nor most economists say the country is in a recession, because the downturn has been limited in breadth.

The Bank of Canada anticipates 2.5% annualized growth in the second quarter after the previous quarter's 0.1% decline, and a 1.5% jump in the third quarter. The central bank said much of this strength reflects the unwinding of temporary factors that restrained growth in the first quarter. "Sources of economic growth appear to be broadening," Macklem said.

The central bank sets interest rates to achieve and maintain 2% inflation. Bank of Canada officials said that the recent rise in inflation--accelerating to 3.2% in May--is mostly attributable to a rise in gasoline prices, stemming from the U.S.-Iran conflict that has thwarted oil-tanker traffic through the Strait of Hormuz. Macklem said inflation is expected to stay elevated in June, and then ease gradually.

Excluding gasoline, total inflation has stayed close to its 2% target, the central bank said, adding that the same goes for measures of core prices. "This suggests that, so far, spillovers to the prices of other goods and services remain contained," the central bank said in its quarterly economic forecast.

The Bank of Canada expects inflation to ease toward 2.5% in the second half of this year.

Write to Paul Vieira at paul.vieira@wsj.com

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July 15, 2026 10:39 ET (14:39 GMT)

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