Bank of Canada set to hold rates as a rebound in growth offsets inflation worries

Inflation remains the main constraint on any easing. Annual inflation rose to 3.2% in May, breaching the central bank's 1%-3% control range for the first time since December 2023, after higher energy prices pushed up household costs.

But measures of core inflation have remained close to 2% and gasoline costs have come down since the start of the US-Iran war. BoC officials have said there has so far been limited evidence that the energy shock is spreading broadly through consumer prices.

"The spike in oil prices has yet to show significant signs of turning into a broader longer-lasting inflation shock," said Nathan Janzen and Claire Fan, economists with RBC, in a note.

Governor Tiff Macklem said after the June decision that the Bank would look through the war-related near-term increase in inflation but would act if higher energy prices produced persistent, generalized price pressures. He also said significant new U.S. trade restrictions could require further rate cuts.