The Bank of Canada held its benchmark interest rate at 2.25 per cent Wednesday as the economy performs below expectations but war in the Middle East threatens higher inflation.
The central bank’s decision to hold its policy rate steady 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.
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While inflation cooled to below the central bank’s two per cent target in February, Bank of Canada governor Tiff Macklem said in prepared remarks Wednesday that the energy price surge is expected to push inflation higher in the coming months.
At the same time, 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.
He said it’s too soon to say what impact the Iran war will have on Canada’s economy, but the added layers of U.S. trade uncertainty and ongoing geopolitical tensions mean risks are tilted toward weaker growth.
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.”
He said monetary policymakers at the central bank 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,” Macklem said.
"As the outlook evolves, we stand ready to respond as needed."
The Bank of Canada will update its forecasts for inflation and the economy at its next interest rate decision set for April 29.
This report by The Canadian Press was first published March 18, 2026.
