Key Takeaways
- Analysts expect the Bank of Canada to keep interest rates unchanged at its March 18 meeting.
- Policymakers are likely to highlight inflationary risk from higher oil prices and geopolitical uncertainty.
- The upcoming free trade negotiations remain the biggest wild card for interest rates.
The Bank of Canada may see little justification to change interest rates, but analysts warn that rising oil price inflation unleashed by the Iran conflict could join the central bank’s list of risks at its meeting on March 18.
The Bank has repeatedly maintained that the policy rate of 2.25% is appropriate since setting it there in December. However, analysts now expect the Bank to note that the sustained Middle East tensions could reignite inflation, potentially reversing the recent softening. This could complicate policymakers’ outlook for rates, which is already clouded by trade uncertainty.
“We don’t expect an interest rate move, [since] the overnight rate is in the ‘neutral zone,’ and we don’t believe the Bank is in a hurry to cut or raise rates,” explains Philip Petursson, chief investment strategist at IG Wealth.
The neutral rate is a theoretical marker at which monetary policy neither stimulates nor restricts the economy.
That said, “Given oil is a global commodity, and Canadians are not immune to an increase in the price of crude, it only stands to reason that the Bank will highlight Iran and the uncertainty it brings with respect to the economic impact of oil prices to the statement.”
Should the Bank of Canada leave rates unchanged, this would mark its third consecutive hold since December, after it cut rates by a cumulative 1 percentage point in 2025. Investors will look for clues in the Bank’s assessment of the economic impact of higher oil prices, a drawn-out Iran war, and the outcome of upcoming trade renewal talks with the United States.
What to Expect from Wednesday’s Meeting
Ashish Dewan, senior investment strategist at Vanguard Canada, expects the Bank to adopt a moderate tone while keeping rates on hold this Wednesday. “The Bank of Canada has emphasized that excess supply in the economy and ongoing upward cost pressures are broadly offsetting, signaling little urgency to either ease or tighten policy further,” he says. He adds that while core inflation has cooled materially since late 2025, disinflation (a slowdown in the rate of price increases) has not yet been sufficiently durable to justify further easing.
JP Morgan Asset Management global market strategist Jack Manley says the Bank will acknowledge the Iran war fallout, along with preexisting headwinds: “I expect the Bank of Canada [to] not move rates this meeting, to address the [Middle East] conflict and its risks head on, to mention the upcoming CUSMA renegotiations, and to leave future [policy rate moves] open ended.” He notes that as always, the Bank will cut or raise rates in response to what the evolving economic data shows.
The Iran War to Enter the Bank’s Vocabulary
The US-Israel-Iran war will certainly be mentioned by policymakers at its Wednesday meeting, according to Taylor Schleich, a rates strategist at National Bank Financial. “They’ll cite that inflation will rise in the near term and that the conflict is adding to geopolitical uncertainty,” he says. “However, we don’t expect them to tie it back to the outlook for domestic monetary policy, at least not yet.”
JP Morgan’s Manley points out that energy price spikes are disruptive for central banks, as they put their main mandates at odds. “[Energy shocks] slow down growth by pulling away discretionary income and increase prices both directly and indirectly,” he says. “This risk will undoubtedly be highlighted by the Bank of Canada in their March meeting, even if the conflict is resolved [by then].”
Sebastien Lavoie, chief economist at Laurentian Bank, says the war may only receive a passing reference at the meeting. “We expect the Iran war to be the direct and indirect subject of one or two sentences of the statement,” he says. “The classic communication would be to say the consequences will depend on the persistency of the oil/inflation shock.”
Bradley Saunders, North America economist at Capital Economics, says the Bank will be cautious in its risk assessment of the war. “[The] uncertainty around the path of the conflict will deter policymakers from taking decisions they may later need to reverse,” he says. “Helpfully, the Bank’s existing concerns about supply frictions means it has kept policy a bit tighter than it might otherwise have done, with the policy rate still within the estimated neutral range of 2.25%-3.25%.”
Key Factors Could Force the Bank off the Sidelines
The outcome of the free trade agreement overrides all other risks, according to Vanguard’s Dewan. “A breakdown in CUSMA negotiations or a broader spillover of trade‑related disruptions into the labor market beyond sectors directly affected by tariffs could prompt the Bank of Canada to provide additional monetary support,” he says.
The free trade treaty shields many Canadian sectors from steep US levies. “A positive or negative CUSMA outcome would likely lead to at least a 50 basis points higher/lower policy rate,” says Laurentian Bank’s Lavoie.
Notably, until recently, the overarching market sentiment leaned toward a rate hike happening later this year. But JP Morgan’s Manley doesn’t see it as a possibility, since “inflation seems to be under control and growth could soften even without oil shocks in the equation.”
IG Wealth’s Petursson argues against the idea that higher energy prices could reignite inflation and push the central bank to tighten policy. Instead, he thinks the Bank might cut rates to offset the negative impact of higher prices. “Raising interest rates won’t lower oil prices. If anything, [it] will only exacerbate the economic headwinds of higher oil price inflation,” he says. “We believe if the war persists and oil prices move higher, the more likely scenario will be a cut by the Bank of Canada.”
