Bank of Canada holds key rate as Macklem downplays recession talk

OTTAWA — Bank of Canada governor Tiff Macklem doesn’t think the economy is in a recession, but he does acknowledge some recent weakness — something other economists argue should give the central bank more leeway to keep its key interest rate steady for the rest of the year.

The central bank’s policy rate remains at 2.25 per cent Wednesday after the central bank’s fifth consecutive hold, a move that was widely expected by economists.

The Bank of Canada’s rate decision arrived after days of debate over whether the country is in a recession, triggered by a second straight economic contraction in the first quarter of the year.

Macklem said Wednesday that the economy was weaker than expected in the first quarter as U.S. trade policy and the war in Iran spur geopolitical uncertainty.

Asked whether he thought the economy was in a recession, Macklem said that label isn’t yet warranted — echoing the chorus of economists who argue the current downturn fails to meet that bar.

“Based on the data we’ve seen to date, the economy is weak, but it is not clearly in recession,” Macklem said.

In its April forecast, the Bank of Canada called for growth of 1.5 per cent in the first quarter of the year. Macklem chalked much of that miss up to an unexpected pullback in government spending, which he said can be choppy from one quarter to the next.

While there’s been some volatility in the economy and labour market over the past year, Macklem said the wider trend is of flat growth, not a pronounced decline. More than half of Canadian industries were also growing in the first quarter of the year despite the marginal headline decline, he noted.

Recent economic data, including a strong May jobs report, signals the economy could rebound in the second quarter of the year, Macklem said.

“So far, we have not seen a significant, broad-based decline in economic activity,” he said.

“Recession is not the word I would use.”

Macklem highlighted that the upcoming review of the Canada-U.S.-Mexico agreement, or CUSMA, comes with significant risks for the economy. An outcome that sees current tariff levels ratchet up, or that sees uncertainty persist into the second half of the year, would hamper Canada’s economic recovery.

Michael Davenport, senior economist at Oxford Economics, said he believes Macklem has the right interpretation of recent data, including sharp risks around the upcoming CUSMA renewal.

“The Canadian economy is definitely a little bit weaker than we had thought, say, a couple of months ago, but we don’t think that the Canadian economy’s currently in a recession,” Davenport said.

Global oil prices — driven higher by the Middle East conflict — are meanwhile staying higher than first thought in the Bank of Canada’s April forecast. Opposing pressures on prices and economic growth put the central bank in a dilemma, Macklem said.

“Raising rates to dampen inflation could further slow the economy. Easing rates to support growth increases the risk that higher inflation becomes persistent,” he said.

“For now, holding the policy rate unchanged balances those risks.”

Annual inflation rose to 2.8 per cent in April, in part because of the global energy shock. The Bank of Canada now expects inflation to hold around three per cent in the coming months before easing back toward the central bank’s two per cent target.

Macklem said there has so far been “limited evidence” that higher energy prices are passing through into broader inflationary pressures.

He said the Bank of Canada will keep looking through the short-term rise in inflation tied to the oil price shock. He also reiterated the central bank will act to prevent price pressures from becoming entrenched.

Core inflation — a group of metrics the Bank of Canada uses to track underlying price trends — has cooled in recent months despite the rising headline rate. Macklem said the central bank “might have to take some action” if that trend were to reverse course.

Financial market odds call for the Bank of Canada to hold rates steady again at its next meeting on July 15, according to LSEG Data & Analytics. But markets are pricing in a quarter-point hike before the end of the year.

“We think that misses the mark. We think the Bank of Canada is more likely going to remain on hold for the remainder of this year,” Davenport said.

In order for the central bank to raise its policy rate this year, he argued core inflation would have to pick up steam and price pressures would have to broaden across the consumer basket. Long-term inflation expectations from businesses and consumers would also have to rise, but those have so far been grounded in the wake of the Middle East oil price shock.

“None of that, we think, is likely given the current weak macroeconomic backdrop,” Davenport said.

KPMG chief economist Ali Jaffery said in a media statement that the focus on recent economic weakness gave Macklem’s remarks a “dovish” tone — suggestive of looser monetary policy rather than any tightening.

Risks of persistent inflation seem low in the face of a soft economy, Jaffery argued.

“Even if the economy perks up in Q2 — which it likely will — there is a lot of room for non-inflationary growth when an economy is coming out of a hole like this,” he said.

CIBC senior economist Andrew Grantham said in a note to clients that Wednesday’s rate decision reflects a “very patient central bank” content to wait and see how the risks play out.

He said CIBC continues to expect no change to the policy rate in 2026 as the current rate level supports a modest recovery in the economy starting later this year.

This report by The Canadian Press was first published June 10, 2026.

Craig Lord, The Canadian Press