Tiff Macklem takes part in a news conference after announcing the Bank of Canada's March 6, 2024, interest rate decision in Ottawa.Blair Gable/Reuters
Jeremy Kronick is president and chief executive of the C.D. Howe Institute, where Steve Ambler, an emeritus professor of economics at Université du Québec à Montréal, is the David Dodge Chair in Monetary Policy.
Friday’s announcement that the Canadian economy lost 84,000 jobs in February – driven by the loss of more than 100,000 full-time jobs – led to some speculation over the weekend that the Bank of Canada might cut its policy rate. Monday’s inflation numbers, with headline inflation falling to 1.8 per cent in February from 2.3 per cent in January, fuelled that speculation further. But after five straight months of inflation above 2 per cent, elevated food inflation, and now oil and gas prices, which have experienced huge jumps since the war in Iran began, the Bank of Canada held its policy interest rate at 2.25 per cent. It was the right call.
This does not mean that the Bank of Canada will continue to leave the policy rate unchanged. As it looks ahead, it will have to weigh a number of demand- and supply-side factors, judge how long each effect is likely to last – in other words, what it can look through and what it cannot – and assess the impact on inflation expectations. Two factors stand out: The duration of the war in Iran and the outcome of the review of the United States-Mexico-Canada Agreement. Both are littered with uncertainty.
Start with the war in Iran. Two days before the attacks on Iran began on Feb. 28, the price of crude oil was US$65 a barrel. By March 15, with the Strait of Hormuz effectively closed – a negative supply-side shock – the price had shot up to more than US$100 a barrel. Retail gasoline prices quickly followed. The national average gas price as of Friday was $1.55, compared with $1.30 before the war erupted, a 20-per-cent jump.
This surge has not yet fed into official inflation figures, but it will next month. This is a classic supply-side effect, and so the question becomes how long it will last. The longer it does last, the more it will feed into costs at all stages of the production process, from planting new crops to keeping goods on store shelves. In turn, this could destabilize inflation expectations.
Long-run inflation expectations were remarkably stable during the postpandemic inflation surge. But gas prices play a disproportionate role in household inflation expectations. As do food prices, and as we pointed out after the last announcement, those costs have also been increasing at an uncomfortable clip. If inflation expectations become de-anchored, they can trigger a cycle of wage and price increases that ultimately makes those expectations self-fulfilling.
The Iran war has raised food inflation fears. Here are the most affected groceries
Even before the attacks on Iran, uncertainty was already in the air, after the U.S. Supreme Court invalidated President Donald Trump’s use of the International Emergency Economic Powers Act to impose sweeping tariffs.
The Feb. 20 decision does not affect tariffs imposed under other legal frameworks, including those on steel and aluminum. In response, the Trump administration announced a new 10-per-cent global tariff under Section 122 of the Trade Act of 1974. Critically for Canada, this change in policy does not affect USMCA-compliant products. For now, Canada still faces a much lower tariff on average relative to other countries.
But we don’t know where USMCA will end up. Mr. Trump’s team has been clear that they will not renew the pact if they don’t get an agreement they like. They also have the option to pull out of the deal with six months’ notice to its two other trading partners. For an agreement that has led to $1.6-trillion a year in trade between the three countries, there is a lot at stake.
And while Canada’s economy was surprisingly resilient in 2025 despite the tariffs, there have been cracks appearing, including a drop in fourth-quarter 2025 gross domestic product. The loss of 84,000 jobs in February pushed the unemployment rate from 6.5 to 6.7 per cent, and the only reason it didn’t cause a bigger spike was that labour force participation fell – not a good sign.
This all leaves the bank in a situation where the demand side of the economy is weak and there are inflationary pressures coming from the supply side. The Bank of Canada will have to make a judgment call about how long high crude oil prices will last. If the shock proves temporary, they can look through it. If it persists, they must weigh its inflationary impact against the economic damage that trade uncertainty could inflict on employment and production.