Monetary Policy Report—July 2026
After a year of weakness, Canada’s economy is showing signs of improvement. Growth is expected to pick up, and inflation eases gradually from its recent peak. Uncertainty is still high.
The Canadian economy has been adjusting to US tariffs and continued uncertainty about the review of the Canada‑United States‑Mexico Agreement, as well as slower population growth. Business investment has been roughly flat, exports and housing activity have declined and economic growth has been uneven. As a result, the level of gross domestic product was roughly unchanged from the first quarter of 2025 to the first quarter of 2026. The unemployment rate has generally fluctuated between 6½% and 7%, pointing to excess supply in the economy.
Consumer price index inflation in Canada was close to the 2% target for more than a year and a half until the war in the Middle East began. The hostilities caused global oil prices to spike, pushing up gasoline prices. Inflation rose to 3.2% in May. However, inflation excluding gasoline, as well as measures of core inflation, stayed close to 2%. This suggests that, so far, spillovers to the prices of other goods and services remain contained.
Canadian businesses are adapting to elevated geopolitical uncertainty stemming from US trade policy and developments in the Middle East. Despite some volatility, recent data suggest that the economy is evolving broadly in line with the outlook in the April Report, increasing confidence that households and businesses are navigating this period of global upheaval.
Growth is picking up
Growth in the second quarter is anticipated to be solid at 2.5% after stalling in the first quarter. Much of this strength reflects the unwinding of temporary factors that restrained growth in the first quarter. There are also signs that growth is broadening.
Overall, growth is expected to have averaged just above 1% in the first half of 2026 and to average around 1.5% in the second half of the year.
As the economy continues to adjust, excess capacity is projected to be gradually absorbed, with growth of 1.8% in both 2027 and 2028. Exports increasingly contribute to growth over the projection horizon, while consumer and government spending remain important drivers. Both business and residential investment are expected to recover modestly.
Inflation eases gradually toward the 2% target
Inflation in Canada is expected to ease to about 2½% in the second half of 2026. It then reaches the 2% target by early 2027. The projection for inflation in this Report is based on the oil price futures curve as of July 9, 2026, and on an assumed narrowing in gasoline margins (see Chart 8 in the Current conditions section). Although oil prices are lower than their peak in April, they remain volatile and highly dependent on events in the Middle East.
Cost pressures will continue to pass through to prices for consumer goods and food (see In focus: War‑related supply disruptions are passing through to consumer prices). These pressures are being offset by softer inflation in services prices and subdued growth in labour costs.
Inflation stays around 2% over the rest of the projection horizon as remaining cost pressures fade and excess capacity is absorbed. On a year‑over‑year basis, inflation fluctuates because of some sizable base-year effects. The forecast for inflation is highly dependent on developments in the Middle East.
There are risks to the outlook for inflation beyond those related to the war in the Middle East and US trade policy. Inflation could be higher if global cost pressures or the depreciation of the Canadian dollar pass through more persistently to consumer prices or if excess supply is less than estimated. Inflation could be lower if global financial conditions tighten and sharply curtail economic activity or if the recovery in exports proves weaker than projected (see the Risks section).