The Bank of Canada maintained its overnight policy rate at 2.25% this morning.  In the statement accompanying the decision, the Bank noted that the war in the Middle East has increased volatility and heightened risks in the global economy but the Bank still expects the Canadian economy to grow modestly in 2026 though the labour market remains soft and growth looks to be weaker than expected in Q1. On inflation, the Bank expects the sharp increase in energy prices to push CPI inflation higher in coming months.

Absent a U.S. war with Iran and its knock‑on effects on oil prices and other downstream costs, there is a strong case for the Bank of Canada to be lowering its policy rate. Core inflation continues to decelerate, with three‑month measures falling again in February and now averaging just over 1%. Economic growth is likely to come in below the Bank’s somewhat optimistic Q1 forecast, and Canada just recorded its weakest month for employment growth since 2022. Instead, the Bank will need to assess the inflationary impulse from a potential supply shock and the risk of pass‑through to inflation expectations, which argues for some degree of caution. Most estimates suggest that an extended period of high oil prices could add 1% to inflation, potentially pushing growth in consumer prices back to over 3%. While it is possible that the Bank would look through a temporary shock to prices and react instead to a weakening economy, the situation is currently too uncertain for there to be any strong conviction in a policy direction.