Key Takeaways
- The Bank of Canada held its overnight interest rate steady for a third consecutive time.
- Policymakers say energy inflation has been contained so far, but a drawn-out Middle East conflict remains a risk.
- Analysts point to ongoing energy inflation and trade talks as the biggest factors in the Bank’s next rate decision.
The Bank of Canada left its overnight interest rate unchanged at 2.25% for the third time in a row, but said it was prepared to act decisively if energy-driven inflation threatens to stick around.
For now, policymakers say it’s too early to assess the Iran conflict’s impact on Canada’s growth trajectory. “Governing Council will look through the war’s immediate impact on inflation, but if energy prices stay high we will not let their effects broaden and become persistent inflation,” the Bank said in its accompanying statement.
Analysts say central bankers must balance the inflationary impact of higher energy prices with slowing growth—a dynamic further compounded by a softening job market, a rising unemployment rate, and ongoing tariff-driven weakness in exports. The Bank has acknowledged that growth is slowing, as “trade and geopolitical uncertainties remain, and the conflict in the Middle East has broadened the range of possible outcomes.”
After cutting by a full percentage point over the course of 2025, the central bank has kept rates on hold since December, watching the economic situation evolve.
Following the announcement, the Canadian dollar edged lower against the US dollar to C$1.37, or 0.72 US cents. The S&P/TSX Composite Index fell 311 points, or 1.02%, to 32,615.08, while the Morningstar Canada Index slid about 60 points, or 1.1%, to 5,804.56. The yield on Government of Canada 2-year bonds rose 0.02 percentage points to 2.69%.
What Analysts Think of the Bank of Canada’s Latest Announcement
There is broad consensus that the energy shock from the Iran war, as well as slowdowns in economic growth, have complicated the Bank’s policy outlook. However, views diverge on the timing of the Bank’s next move. Analysts from Vanguard, TD Economics, Desjardins, and Oxford Economics expect the Bank to keep rates on hold through the year, while others at Mackenzie and IG Wealth suggest cuts will resume later this year.
Policy to Remain Paused Until More Clarity on War Emerges
“The quick takeaway is that the Bank can afford to be patient over the near term, with economic slack and moderate underlying inflation trends now. But the inflation risks could build later this year if the conflict and elevated oil prices persist. It all depends on how long the conflict lasts, and how persistent the strength in energy prices turns out to be.
“Like all central banks, the conflict in Iran has put the Bank of Canada in a tough spot, with growth risks tilted to the downside, while inflation risks have mounted. The Bank suggests it’s still too early to properly assess the net impact on the Canadian economy. Policy is thus on hold until there’s more information on the duration and extent of the energy price shock. It’s also abundantly clear that the Bank of Canada was more concerned about the outlook prior to the war, and would have been even more dovish [leaning towards easing] in today’s statement were it not for the spike in oil prices.”
—Douglas Porter, chief economist at BMO Economics
Iran War and Trade Treaty Hold the Key to Policy Moves
“There was little doubt that the Bank would keep rates unchanged at today’s meeting. The key focus was therefore on how policymakers judged the outlook to have evolved given the unfolding energy crisis and a flurry of weak activity and labor market data released since January’s meeting.
“On the whole, the Bank showed a marginally dovish tilt, which will be much to the disappointment of investors, who have moved to fully price in a rate hike this year over the past three weeks. Ultimately, much is resting on two highly uncertain events: the Iran war and the CUSMA [the Canada-United States-Mexico Agreement] renegotiation.”
—Bradley Saunders, North America economist at Capital Economics
The Bank Gave No Direction on Policy
“It wasn’t due to make a new forecast, so it opted not to deliver one, and in the end, stayed neutral by saying that it is ‘ready to respond as needed’ but giving no signal on which direction such a response might take. In the opening statement for the press conference, it put a bit more emphasis on some of the downside implications for growth from higher energy prices than on the boost to income from energy exports, citing financial conditions tightening and the squeeze on consumers.”
—Avery Shenfeld, chief economist at CIBC Capital Markets
Rates Likely to Remain on Hold for the Year
“The Bank of Canada is caught between two opposing forces: surging global energy prices and a weakening domestic economy.
“Markets haven’t moved all that much on the rate announcement, with implied pricing still pointing toward one hike for this year. That said, the tone of these communications reinforces our view that the Bank of Canada is willing to look through the impacts of higher energy prices on CPI so long as the conflict doesn’t last for too long. As a result, we continue to expect officials will leave the policy rate unchanged for the duration of this year.
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
Rate Cut Remains More Likely Than a Hike
“The Bank is increasingly acknowledging softer economic momentum and a labor market that’s losing some steam, while also flagging upside risks to inflation from higher oil prices and geopolitical disruptions. But it’s important to distinguish the type of inflation we’re dealing with. This isn’t demand-driven inflation that central banks can easily cool with higher rates—it’s a supply shock. Higher oil prices act more like a tax on consumers, eroding purchasing power and weighing on growth.
“Hiking into that environment risks amplifying the slowdown rather than solving the problem. That’s why we remain skeptical of market pricing that points to hikes later this year. In Canada, the economy is already showing signs of fatigue, with weaker growth, a slowing pace of immigration, and a housing market that has lost momentum, all key pillars of recent expansion. Layer on elevated household debt and a more mixed labor market, and the case for further tightening becomes difficult to make. Instead, a rate cut remains a real possibility by year-end if the data continues to soften.”
—Philip Petursson, chief investment strategist at IG Wealth Management
A Rate Cut Could Come by June
“Importantly, the Bank of Canada removed its previous language stating that “the current policy rate remains appropriate” and instead leaned on the downside growth narrative and the impact of higher oil prices on the economy. With the domestic labor market weak, a fragile housing market and USMCA [the United Sates-Mexico-Canada Agreement] negotiations still ahead, we continue to believe the Bank of Canada could cut rates by June, particularly if we do not see a significant escalation in energy prices from present levels.”
—Dustin Reid, chief strategist, fixed income at Mackenzie Investments
Trade and War Uncertainty Prevent a Rate Move
“Elevated uncertainty from the Middle East conflict and US-Canada trade policy will likely keep the Bank of Canada in a holding pattern for all of 2026. The outlook for inflation, growth, and Bank of Canada monetary policy hinges on developments in the US/Israel-Iran war and the upcoming USMCA review, both of which are highly uncertain.”
—Tony Stillo, director of Canada economics at Oxford Economics
The Bank Will Remain in a Holding Pattern
“The war in the Middle East is the dominant factor here. How long it disrupts supplies of energy products and other goods is the determinant of how big the associated inflationary impact will be. The Bank of Canada is focused on the pass-through to core prices and any shifts to inflation expectations. Given a domestic economic backdrop that has featured still-elevated unemployment, softening core inflation and growth risks ‘tilted to the downside’, we expect the Bank of Canada to stay on the sidelines, for now. However, uncertainty is high and the supply shock could easily escalate, broadening inflation beyond energy prices. In the event that both core inflation and inflation expectations drift higher we would expect the Bank of Canada to be ready to respond.
—Andrew Hencic, director and senior economist at TD Economics
A Rate Hike Unlikely in 2026, Barring Prolonged Iran Conflict
“While core inflation has cooled materially since late 2025, allowing the Bank to deliver 100 basis points of rate cuts last year, the disinflation has not yet proven sufficiently durable to justify further easing, despite weaker labor market data this year. The Bank is likely to require a more prolonged deterioration in labor conditions before cutting again.
“At the same time, fiscal policy is already providing stimulus through infrastructure spending, housing programs, and targeted credits, effectively reducing the need for additional monetary support. Ongoing trade tensions and tariff uncertainty, meanwhile, represent supply‑side and geopolitical challenges that monetary policy is ill‑suited to address, limiting the effectiveness of rate cuts as a response. If the Middle East conflict were to become protracted and persist for more than two quarters, the Bank of Canada would likely become more inclined to hike rates, as headline inflation could rise by roughly 75 basis points and core inflation by about 30 basis points. We expect the Bank of Canada to hold its policy rate at 2.25% throughout the year in our base case.”
—Ashish Dewan, investment strategist at Vanguard Canada
