Key Takeaways
- The Bank of Canada held its overnight interest rate steady for a fourth consecutive time.
- Policymakers noted that multiple rate raises may be needed if energy inflation seeps into the broader economy.
- Some analysts now expect the Bank’s next move to be a rate hike.
The Bank of Canada kept its overnight interest steady at 2.25% for the fourth consecutive time on Wednesday. Still, analysts say the central bank is signaling that its next move could be a hike amid upward pressure on inflation from rising energy costs.
In its policy statement, the Bank highlighted concerns about the inflationary impact of the oil price spike caused by the Iran war. “If oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing generalized inflation increases,” said Bank Governor Tiff Macklem at the press conference following the announcement. He stressed that while the Bank would be “looking through the war’s immediate impact on inflation,” if it spills into the broader economy, “there may be a need for consecutive increases in the policy rate.”
Amid those concerns, the Bank struck an optimistic note, saying it expects the economy to rebound this year, reversing the contraction seen in the fourth quarter of 2025. The Bank’s April forecast puts 2026 economic growth at 1.2%, rising to 1.6% in 2027 and 1.7% in 2028. “With GDP growing slightly above potential, the current excess supply in the economy is gradually absorbed,” the Bank said.
The Bank’s statement acknowledged that the Iran war could alter the composition of economic growth, but overall GDP growth forecasts remain unchanged: “Since Canada is a large net exporter of oil, higher oil prices increase national income even as consumers are squeezed by higher gasoline prices.”
Macklem also noted the Bank’s openness to “cut the policy rate further to support economic growth [if] the US imposes significant new trade restrictions on Canada.” The Bank cut the overnight rate by a total of 1 percentage point over the course of 2025 before moving to the sidelines in December.
The Canadian dollar remained steady against the US dollar at C$1.36, or 0.73 US cents, in response to the rate announcement. The S&P/TSX Composite Index edged 0.25 percentage points down to 33,447.94, while the Morningstar Canada Index slid 0.28 points to 5,978.96. The yield on Government of Canada 2-year bonds rose 0.02 points to 2.90%.
Following the announcement, analysts said persistent energy inflation is strengthening the case for the Bank’s next move to be an interest rate increase, rather than a resumption of last year’s cuts. However, views diverge on the timing of any hike. Analysts from Vanguard, BMO, and TD Economics expect the Bank to keep rates on hold through the year. Analysts at Desjardins Capital Markets call for a rate hike in 2027, while those at Capital Economics expect a hike could come as early as this year.
Here’s a look at what some analysts are saying about the latest Bank of Canada meeting and the outlook for interest rates.
The Bank to Monitor Inflation as It Waits for More Clarity on Iran War
“There remains a huge number of unknowns for the outlook, with oil and trade looming largest. Until we get more clarity, the Bank of Canada is likely going to stay on hold. However, it is apparent that policymakers want to push back on any second-round inflation effects, so CPI data over the next few months will be watched closely if energy prices don’t retreat.”
—Benjamin Reitzes, managing director, Canadian rates and macro strategist at BMO Economics
A Rate Hike Could Come Sooner Than 2027
“While the Bank continued to say it would ‘look through the war’s immediate impact on inflation’, it also acknowledged that ‘near-term inflation expectations have moved up’, as evidenced in its own timely Business Leaders’ Pulse survey. The Bank also mentioned that above-potential GDP growth would ‘gradually absorb’ the current excess supply in the economy, something which policymakers have pointed to as justification for lower interest rates in the face of counter-tariffs and, more recently, the oil price shock. The most direct warning came in Governor Tiff Macklem’s opening statement to the press conference, where he warned that, in the event of oil prices remaining elevated, ‘there may be a need for consecutive increases in the policy rate.’ With WTI back above USD100 per barrel for the first time in over a fortnight and negotiations between the US/Israel and Iran seemingly at a standstill, there are growing risks to our view that the first interest rate hike will come in 2027.”
—Bradley Saunders, North America economist at Capital Economics
The Bank Appears Set to Continue to Remain on Hold
“The Bank of Canada will be standing on guard for thee, but that’s not just against elevated inflation, but also sluggish growth and excessive slack, a two-way risk that is keeping interest rates frozen in place. The Bank assumed that oil prices will gradually decline to USD 75/bbl in mid-2027, still lifting near term inflation but leaving the growth outlook little changed from the prior forecast, one that only makes very gradual progress in eliminating economic slack. It sees ‘little evidence’ of a spillover to core inflation so far, but will keep an eye on that, and ‘will not let higher energy prices become persistent inflation’. It’s worth noting that the Bank doesn’t see that happening, projecting a spike to 3% inflation but a return to the 2% target early next year, a view we share, and while it says it might need to adjust the policy rate, those changes ‘can be expected to be small.’ That sounds like a central bank that thinks it could stand pat, as it cites both reasons why it might have to cut (due to trade restrictions) or hike (if energy prices spark a broader inflation).”
—Avery Shenfeld, chief economist at CIBC Capital Markets
The Bank Is Unlikely to Hike Rates Until 2027
“Overall, the Bank of Canada appears comfortable leaving rates unchanged for the rest of the year, unless oil prices remain high. Assuming oil prices decline to levels consistent with their assumptions, the central bank’s communications suggest that any changes in the target rate will be small. We take that to mean that once the economy recovers to full health, central bankers will raise the policy rate gradually to 2.75%, the midpoint of their estimated neutral rate range. Our expectation is that those rate increases aren’t in the cards until 2027.”
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
The Bank’s Outlook Remains Tied to the Middle East Conflict
“From our lens, the outlook has only gradually shifted. The BOS [Business Outlook Survey] survey suggested some upside to business confidence, but the outlook for firms remains very murky. The worry is what happens with energy prices. Our expectation is that prices peak this quarter and gradually fall, taking pressure off inflation and allowing the Bank of Canada to stay on hold at the lower end of their neutral range. Of course, the risks to the outlook are high, and remain contingent on the course of the Middle East conflict.”
—Andrew Hencic, director and senior economist at TD Economics
A Rate Hike Is Unlikely This Year
“With higher energy prices reflecting a supply‑side shock rather than stronger demand, additional rate hikes would do little to address inflation pressures. A temporary suspension of the federal gasoline and diesel tax should also help ease headline inflation. In this environment, the Bank is likely to stress data dependence and patience, acknowledging progress on core inflation while remaining reluctant to signal rate cuts. Our base case remains for the policy rate to hold at 2.25% through the remainder of the year.”
—Ashish Dewan, investment strategist at Vanguard Canada
