The Bank of Canada is holding its policy rate at 2.25 per cent

The Bank of Canada is holding its policy rate at 2.25 per cent and says that it expects the Canadian economy to improve, despite flatlined growth over the past 18 months.

But there are big caveats. Although the economy is showing signs of improvement and inflation is easing, the BOC’s new monetary policy report released today warns that uncertainty driven by U.S. tariffs and the war in the Middle East could knock potential growth off course.

The BOC report indicates that the level of gross domestic product was “roughly unchanged from the first quarter of 2025 to the first quarter of 2026.”

GDP growth was close to zero, weaker than the 1.5 per cent growth the central bank projected in April.

Growth was dragged down last quarter by several temporary factors.

According to the report, this included an unexpected decline in government spending, a fall in motor vehicle production and a sudden drop in oil and gas investment.

Housing activity also dropped in the first quarter “hampered by affordability challenges, slow population growth and elevated economic uncertainty.”

However, consumer spending “remained resilient” last quarter despite elevated uncertainty and higher gas prices.

The BOC says that there was a “rebound” in the second quarter between April and June, which saw a pickup in exports and residential investment. As a result, the central bank estimates the economy will grow just above one per cent in first half of 2026.