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 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 50 per cent over the past month, and the average price of gasoline in Canada has jumped nearly 40 cents a litre.
Governor Tiff Macklem said the bank will “look through” the immediate spike in inflation caused by higher gasoline prices. But the governing council is “ready to respond,” he said, if the energy shock starts feeding into broader goods and services prices, and household and business inflation expectations move higher.
“If energy prices stay high, and we start to see evidence that it’s generalizing and becoming more persistent, we can raise the policy interest rate to cool inflation,” Mr. Macklem said in a press conference after the rate announcement.
“On the other hand, if energy prices come back down, we see more weakness in the economy, we can lower our policy rate to add more support. The message is, there’s a lot of uncertainty there. We’ll be following those developments carefully and we’ll respond as needed.”
Before the outbreak of the war, the Bank of Canada was widely expected to keep rates steady through 2026. Financial markets are now pricing in the possibility of a hike in the back half of the year.
The U.S. Federal Reserve also held the target range for its policy rate steady at 3.5 to 3.75 per cent on Wednesday, citing uncertainty about the economic outlook as well as inflationary pressures created by tariffs and rising oil prices.
“In the near term, higher energy prices will push up overall inflation,” Fed chair Jerome Powell said in a press conference after the announcement. “But it is too soon to know the scope and duration of the potential effects on the economy.”
The energy shock is hitting Canada at a delicate moment, creating a conundrum for the central bank.
Canada’s economy contracted in the fourth quarter of 2025, and GDP growth so far this year is trending below the central bank’s most recent forecast, with risks “tilted to the downside,” according to the bank.
The labour market shed 84,000 jobs in February while the unemployment rate hit 6.7 per cent. U.S. tariffs and uncertainty about the future of the North American free-trade pact is weighing on Canadian exports and 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.
“If you didn’t have inflationary pressures [from the oil price shock], I expect we would be talking about lower rates,” Mr. Macklem said.
“But we’re operating in a world where there’s more than one thing going on. We’re now facing increased inflation risks, and those two things go in opposite directions for monetary policy,” he said.
Just how high inflation goes, and how worrisome it becomes for the Bank of Canada, will depend to a large degree on the duration of the war in the Middle East and how much damage is done to energy production facilities in the region. The price of a barrel of Brent crude rose more than 6 per cent on Wednesday to around US$110, as key Iranian energy infrastructure was reportedly hit with air strikes.
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The higher energy prices go – and the longer they remain elevated – the more likely companies will pass their increased production and transportation costs along to customers. Meanwhile, a sticker shock at the gas pump can raise 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,” Mr. Macklem said. “But the longer this conflict lasts and the wider it gets, the bigger the risks.”
Canadian Imperial Bank of Commerce chief economist Avery Shenfeld said Mr. Macklem’s message was actually more dovish than financial markets seem to appreciate.
“It’s really only in a persistent energy shock scenario in which the bank has some fighting words,” Mr. Shenfeld wrote in a note to clients, saying that he still expects the bank to remain on hold this year.
“If the oil shock is over by the summer, there will be more of a risk of a cut this year than a hike, judging by the Governor’s comments,” Mr. Shenfeld added.
Energy shocks are tricky for central bankers to manage, as they tend to crimp economic activity, at least in the near term, while pushing up inflation. This type of “stagflation” shock forces policy makers to choose between raising interest rates to head off inflation and cutting interest rates to bolster the economy.
Both Canada and the U.S. are relatively well placed to handle an energy price shock, given their status today as major oil producers and exporters. That’s different than during the OPEC oil crisis of the 1970s, when the U.S. was a net importer of oil.
But 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 and constrain spending.
“It is too early to assess the impact of the war on growth in Canada,” Mr. Macklem said.
Both the Bank of Canada and the Fed are entering into this latest bout of inflation on a cautious footing. Memories are fresh about the surge of inflation in 2021 and 2022 that followed the end of pandemic lockdowns and the commodity price shock that accompanied Russia’s full-scale invasion of Ukraine.
But things are different today, at least in Canada, BoC’s senior deputy governor Carolyn Rogers said in the press conference.
“When we went into the supply shock coming out of the pandemic, the economy was overheated. That made it easy for price increases to get passed on,” she said. “We’re not in that same situation now. So that’s something we have our mind on: What’s our starting point going into the supply shock.”