Governor Tiff Macklem is seen during a news conference in Ottawa on Wednesday, when the Bank of Canada announced its third consecutive rate hold.Adrian Wyld/The Canadian Press
The Bank of Canada held its benchmark interest rate steady on Wednesday but said it’s prepared to adjust monetary policy if needed amid a global oil price shock that risks reigniting inflation.
As widely expected, the central bank’s governing council kept the policy rate at 2.25 per cent for the third consecutive time.
The rate decision was made against the backdrop of a sharp rise in energy prices caused by the war between the United States, Israel and Iran, which has largely closed the Strait of Hormuz through which around a fifth of global oil supplies typically travel.
Benchmark oil prices have risen more than 40 per cent in recent weeks, and the average price of gasoline in Canada has jumped more than 30 cents a litre. This will push up the rate of inflation in Canada in the coming months.
“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,” Governor Tiff Macklem said in a press conference after the rate announcement.
“As the outlook evolves, we stand ready to respond as needed,” he said.
Before the outbreak of the war, the Bank of Canada was widely expected to remain on hold through 2026. Financial markets are now pricing in the possibility of a rate hike in the back half of the year.
The energy price shock is hitting Canada at a delicate moment.
The economy contracted in the fourth quarter of 2025, and growth so far this year is trending below the central bank’s most recent forecast. The rate of unemployment hit 6.7 per cent in February, and uncertainty about U.S. trade policy and the future of the North American free trade pact is weighing on business investment.
Economic weakness has kept the rate of inflation trending lower in recent months, hitting 1.8 per cent in February – below the Bank of Canada’s 2-per-cent target.
But headline inflation is sure to rise in the coming months, both because of the jump in oil prices, and because Ottawa’s removal of the consumer carbon tax last April – which has pulled down the annual inflation number – will drop out of the year-over-year inflation calculation.
Just how high inflation goes, and worrisome it becomes for the Bank of Canada, will depend a lot on the duration of the war in the Middle East, and how disruptive it is to oil production.
The higher oil prices go, and the longer they remain elevated, the more likely companies will pass increased transportation and production costs along to customers, pushing up the price of other goods and services. The sticker shock at the gas pump could also increase consumer and business inflation expectations, which can become self-fulfilling.
“With inflation close to target and the economy in excess supply, the risk that higher energy prices quickly spread to the prices of other goods and services looks contained. But the longer this conflict lasts and the wider it gets, the bigger the risks,” Mr. Macklem said.
Energy price shocks are tricky for central bankers to manage, particularly if they hit at a moment of economic weakness. This happened in the 1970s, when the OPEC oil crisis slowed economic activity and pushed up inflation at the same time – a painful combination known as stagflation.
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“Economic weakness combined with rising inflation is a dilemma for central banks,” Mr. 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. Canada’s outlook is further complicated by structural change – shifting trade relationships, the adoption of AI, and changes in demographics.”
As a major oil producer and exporter, higher energy prices tend to benefit the Canadian economy. However, oil prices need to remain elevated for an extended period before energy companies and governments in energy-producing regions ramp up investment and spending. And in the short term, higher gas prices hit household budgets.
“It is too early to assess the impact of the war on growth in Canada,” Mr. Macklem said. “If higher oil prices are maintained, this will boost income from energy exports. At the same time, higher oil prices squeeze consumers, leaving them with less income for other spending.”
Beyond higher oil prices, the war in the Middle East has tightened financial conditions, pushing up bond yields – which influence mortgages rates and other interest rates in the economy – and weighing on stock markets, Mr. Macklem said. He also warned that the closure of the Strait of Hormuz could impact the supply of other commodities, such as fertilizer.
“Canada’s economy is dealing with a lot, and now we face more volatility,” Mr. Macklem said.