The Bank of Canada left its key overnight interest rate unchanged at 2.25% on Wednesday, in line with market expectations, while signaling that the Canadian economy is likely to regain momentum during the second half of the year as inflationary pressures ease.

The decision marked the sixth consecutive meeting in which the central bank kept interest rates unchanged, following an aggressive easing cycle last year that brought the policy rate down to its current level in October.

"The Canadian economy is showing signs of improvement, with growth gradually accelerating, while inflationary pressures are expected to ease following the recent increase," the bank said in its statement.

In its latest economic projections, the Bank of Canada slightly raised its growth forecasts for 2027 and 2028 but lowered its estimate for 2026 growth to 0.7%, compared with 1.2% in its April outlook, reflecting a weaker-than-expected start to the year.

Meanwhile, the bank raised its 2026 inflation forecast to 2.5% from 2.3%, while stressing that inflation is expected to remain close to the midpoint of its 1%-3% target range over the next two years.

Economic activity expected to improve despite persistent risks

The bank expects the Canadian economy to expand at an annualized rate of 2.5% in the second quarter after stagnating during the first three months of the year due to disruptions caused by tensions in the Middle East and uncertainty surrounding US trade policy.

"The data we have received since April have strengthened our confidence that the economy is successfully moving through this period of global disruption," Bank of Canada Governor Tiff Macklem said in prepared remarks for his press conference.

All 36 economists surveyed by Reuters had expected the central bank to leave interest rates unchanged, while most anticipated no change in monetary policy until at least July next year.

Money market pricing also indicates that investors expect interest rates to remain unchanged through the end of this year.

In its quarterly Monetary Policy Report, the bank said developments in Canada-US trade relations and the war in the Middle East remain the two largest sources of risk to its inflation outlook.

Macklem said the bank looks through the direct impact of higher oil prices on inflation but warned that if prices remain elevated for a prolonged period, inflationary pressures could spread to other goods and services.

"As we have emphasized before, we will not allow higher oil prices to turn into persistent inflation," he said.

Following the decision, the Canadian dollar pared its earlier gains and weakened 0.05% to C$1.4062 per US dollar, equivalent to 71.11 US cents. The yield on Canada's two-year government bond fell 3 basis points to 2.627%.

Bitcoin approached a key technical resistance zone around $65,160 during Wednesday's trading after weaker-than-expected US inflation data improved investor appetite for risk assets. However, flows into spot Bitcoin exchange-traded funds (ETFs) remained mixed, reflecting continued caution among institutional investors.

Data released by the US Bureau of Labor Statistics on Tuesday showed the Consumer Price Index (CPI) fell 0.4% month-over-month in June, marking the largest monthly decline since April 2020 and exceeding expectations for a 0.1% decline.

Core inflation, which excludes food and energy prices, was unchanged during the month, compared with expectations for a 0.2% increase. On an annual basis, headline inflation slowed to 3.5%, while core inflation eased to 2.6%, with both readings coming in below market forecasts.

The data reduced expectations for additional US interest rate hikes, weighing on the US dollar and supporting risk assets. Bitcoin rallied about 4.35% by the close of Tuesday's session.

However, the rally lost some momentum after Federal Reserve Chair Kevin Warsh reiterated that the central bank would not tolerate persistently elevated inflation while emphasizing the underlying strength of the US economy.

Warsh said, "If we implement the right policy—and we will—the inflation wave of the past five years will become a thing of the past."

Despite the support from the inflation report, analysts believe investors should remain cautious, as the recent rise in oil prices—driven by renewed tensions between the United States and Iran and the closure of the Strait of Hormuz—could reignite inflationary pressures and strengthen the case for tighter monetary policy, weighing on Bitcoin.

Investors are now awaiting the release of the June US Producer Price Index (PPI), which could provide additional clues about the future path of Federal Reserve policy and trigger increased volatility across risk assets.

Meanwhile, flows into spot Bitcoin ETFs remained mixed. Data from SoSoValue showed net inflows of $181.08 million on Tuesday, following net outflows of $424.66 million in the previous session.

These mixed flows suggest institutional investors remain divided and cautious amid ongoing geopolitical tensions between the United States and Iran, preventing a clear short-term directional trend from emerging for Bitcoin.

Oil prices climbed about 1% on Wednesday, extending their gains after US President Donald Trump reinstated a naval blockade on all Iranian ports, while Iran's Islamic Revolutionary Guard Corps threatened to shut down "all other export routes serving the United States and its allies," intensifying concerns over global energy supplies.

Trading performance

Brent crude futures rose 69 cents, or 0.8%, to $85.42 a barrel, while US West Texas Intermediate (WTI) crude futures gained 73 cents, or 0.9%, to $80.07 a barrel.

Both benchmarks closed about 2% higher on Tuesday, reaching their highest levels in a month as supply disruptions through the Strait of Hormuz worsened. Before the outbreak of the US-Iran conflict, roughly one-fifth of global oil and liquefied natural gas supplies passed through the strategic waterway.

Middle East developments

In a statement carried by Iran's official IRNA news agency, the Islamic Revolutionary Guard Corps said, "Energy exports in the region will either remain available to everyone or to no one."

Analysts believe Tehran is signaling that it could use its Houthi allies in Yemen to disrupt shipping through the Bab el-Mandeb Strait, potentially opening a new front in its confrontation with the United States and threatening two of the world's most critical energy trade routes.

Fighting between the United States and Iran resumed last week, undermining a fragile ceasefire reached in June after months of conflict.

Early Wednesday, the US military announced a new round of strikes aimed at degrading Iran's capabilities used to target commercial shipping in the Strait of Hormuz.

Speaking in an interview with Fox News, President Donald Trump said he would delay targeting Iran's energy facilities but added, "Eventually, we will target the energy facilities."

Giovanni Staunovo, an analyst at UBS, said the US naval blockade on vessels heading to and from Iranian ports is tightening conditions in the oil market, noting that Iran's crude exports have ranged between 1.5 million and 2 million barrels per day over the past two weeks.

Goldman Sachs estimated that Gulf oil exports had recovered to more than 80% of pre-war levels following the US-Iran memorandum of understanding in June, but fell back below 50% over the past week, equivalent to roughly 11 million barrels per day.

The bank said Brent crude could climb above $110 a barrel in the fourth quarter if the recovery in Gulf exports continues to stall.

Despite the escalation, investors remain cautious about pricing in a significant geopolitical risk premium given the rapid shifts in political and military developments.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said markets have become more restrained in reacting to dramatic headlines because many of them ultimately fail to translate into concrete action.

In the latest military developments, the Iranian military announced early Wednesday that it had launched drone attacks targeting US positions at Jordan's Azraq Air Base. The US Department of Defense did not immediately comment.

Iran's Revolutionary Guard also claimed it had targeted weapons storage facilities and military installations in Bahrain and Kuwait, although Reuters was unable to independently verify those reports.

The US dollar was little changed on Wednesday after posting its biggest daily decline in nearly two weeks following weaker-than-expected US inflation data, which reduced market expectations for an imminent Federal Reserve rate hike, although concerns remain that higher oil prices could reignite inflationary pressures.

The dollar was steady against the Japanese yen at 162.24, while the euro and the British pound both rose about 0.1% to $1.1428 and $1.3406, respectively.

The US Dollar Index, which measures the greenback against a basket of six major currencies, held steady at 100.9 after falling 0.4% in the previous session, its biggest one-day decline in nearly two weeks, retreating from its highest level since July 2.

Data released on Tuesday showed US inflation slowed to 3.5% year-over-year in June, below expectations of 3.8%, while the headline Consumer Price Index fell 0.4% month-over-month, marking the first monthly decline since April 2020, driven by lower energy prices.

The softer inflation data pushed US Treasury yields lower, with the two-year Treasury yield falling about 9 basis points from a 16-month high as markets scaled back expectations for a near-term interest rate increase.

Chris Turner, Global Head of Markets at ING, said markets had been increasingly convinced that the Federal Reserve would raise interest rates in September, but the latest inflation figures have cast some doubt on that scenario.

He added that the Fed will likely need several more weak inflation readings before ruling out another rate hike this year, noting that expectations for tighter monetary policy are likely to remain in place in the near term, helping to support the dollar, while energy prices remain a key factor in determining its direction.

In testimony before the House Financial Services Committee, Federal Reserve Chair Kevin Warsh reiterated that the central bank "will not tolerate" persistently elevated inflation and pledged to carry out its mandate even if it faces pressure from US President Donald Trump.

According to LSEG data, markets are now pricing in roughly a 65% probability of a rate hike at the September meeting, while the chances of a move in July have fallen to almost zero.

In the Middle East, the escalating confrontation between the United States and Iran continued to fuel inflation concerns after developments pushed oil prices to their highest level in a month. President Donald Trump reinstated a naval blockade on all Iranian ports, while the US military announced a new round of strikes aimed at reducing Iran's capabilities to target commercial shipping in the Strait of Hormuz.

In other currency markets, the Norwegian krone weakened against both the dollar and the euro after Norway's core inflation slowed more than expected in June, easing pressure on the central bank to raise interest rates next month.

Meanwhile, the New Zealand dollar held near a one-month high at US$0.5815, while the Australian dollar edged slightly higher to US$0.6985.

In China, economic growth slowed to 4.3% in the second quarter, marking the weakest pace in more than three years. The yuan briefly climbed to a one-month high on growing expectations that Chinese authorities will introduce additional economic stimulus measures.