The Bank of Canada held its benchmark interest rate steady Wednesday as monetary policymakers wait to see whether a surge in global oil prices tied to war in the Middle East becomes a wider inflation problem.
The central bank’s decision to hold its policy rate at 2.25 per cent for a third consecutive time was widely expected but the future path for the policy rate is much less clear.
War in the Middle East has sent global oil prices surging in recent weeks and those costs are already being felt at the gas pumps in Canada.
While inflation cooled to below the central bank’s two per cent target in February, Bank of Canada governor Tiff Macklem said Wednesday that the energy price surge will almost certainly push inflation higher in the coming months.
The central bank is willing to look through that near-term inflation spike without reacting with tighter monetary policy, Macklem said.
He said the duration of the Iran war and its long-term impact on the economy and inflation are unknowable at the moment. But he said the added layers of U.S. trade uncertainty and ongoing geopolitical tensions mean risks are tilted toward weaker growth.
Macklem opened the door to interest rate hikes if inflation persists or spreads beyond gas pumps — even as the economy shows signs of weakness.
"If energy prices stay high and we start to see evidence that (inflation) is generalizing and becoming more persistent, we can raise the policy rate to cool inflation," Macklem said.
He added that if energy prices come back down and the economy softens further, interest rate cuts could be on the table.
"As the outlook evolves, we stand ready to respond as needed," Macklem said.
Recent data show the economy is undershooting the Bank of Canada’s forecasts. Statistics Canada said the labour market shed over 100,000 jobs in the first two months of 2026 and real gross domestic product contracted in the fourth quarter of last year.
Macklem said it looks like the economy is growing again but at a slower pace than the central bank previously expected.
The combination of a slowing economy and rising inflation creates a “dilemma” for the Bank of Canada, Macklem said.
“Raising interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target,” he said.
Macklem said that a soft economy means risks that inflation will spread beyond gas pumps to other goods and services appear “contained" for the moment.
The Bank of Canada will update its forecasts for inflation and the economy at its next interest rate decision set for April 29.
TD Bank senior economist Andrew Hencic said in a note to clients Wednesday that he expects the central bank to remain on hold for now with monetary policymakers emphasizing that a soft economy currently limits the risk of higher inflation.
Meanwhile, CIBC chief economist Avery Shenfeld said that if the oil shock resolves by the summer, the central bank is more in line for a rate cut than a hike this year.
Picture Courtesy: THE CANADIAN PRESS/Adrian Wyld
