BoC Governor Tiff Macklem attends a news conference in Ottawa after the central bank's March 18 rate decision.Adrian Wyld/The Canadian Press
The Bank of Canada held its benchmark interest rate steady on Wednesday, but warned that it may need to adjust interest rates if global oil prices remain high or trade talks with the United States and Mexico flounder.
As widely expected, the bank’s governing council kept its policy rate at 2.25 per cent for the fourth consecutive time, even as the conflict in the Middle East has pushed energy prices sharply higher and squeezed Canadian consumers at the gas pump.
Governor Tiff Macklem said the current interest rate level “looks appropriate,” assuming oil prices start to come down and U.S. President Donald Trump doesn’t slap additional tariffs on Canadian goods. But he acknowledged that Canada is facing two major risks in the coming months that could pull interest rates in one direction or the other.
If oil prices keep rising and remain elevated for an extended period of time, “there may be a need for consecutive increases in the policy rate,” Mr. Macklem said in an unusually candid press conference after the rate announcement.
At the same time, “if the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth,” he said, pointing to the uncertainty surrounding the review of the United States-Mexico-Canada trade agreement, which is scheduled for July 1.
Mr. Macklem’s comments highlight the tricky road ahead for the Canadian economy, which is already going through a painful adjustment to U.S. protectionism and now must deal with a potential surge in inflation, less than four years after the biggest jump in consumer prices in a generation.
Financial markets seemed to focus on the bank’s warnings about upside inflation risks.
Interest rate swap markets, which capture market expectations for monetary policy, are now pricing between two and three quarter-point rate hikes by the central bank this year, starting in October, according to Bloomberg data. Earlier this week, markets were pricing between one and two hikes in 2026.
This big shift in expectations may also have been influenced by the surge in global oil prices on Wednesday, which followed another setback in peace negotiations between Washington and Tehran.
The price of a barrel of Brent crude hit US$120, while West Texas Intermediate crude reached US$107. Before the outbreak of the U.S.-Iran war both benchmarks were around US$70.
The energy price shock, which started with the effective closing of the Strait of Hormuz in February, has pushed gasoline prices sharply higher in Canada. That raised the annual rate of inflation to 2.4 per cent in March from 1.8 per cent the previous month, and the bank expects it to hit 3 per cent in April.
The big concern for the bank isn’t the immediate rise in headline inflation. It’s the possibility that higher gas prices will feed through supply chains and push up a broader range of consumer prices while raising inflation expectations.
“If it’s only energy prices that are elevated and the economy is still soft … the bank might still wait this oil shock out,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in an interview. “It’s only if we not only have a protracted hike in energy costs, but start to see the spillover into other aspects of inflation, that they would have to start raising interest rates.”
The U.S. Federal Reserve also remained on hold on Wednesday, citing uncertainty about the impact of oil prices and tariffs on U.S. inflation.
“How long will the Strait be closed? You can develop any number of scenarios that you want, but we really won’t know until we know. So fortunately, we’re in a good place to wait, and let things develop,” Fed Chair Jerome Powell said in a news conference, after holding the target range for the federal funds rate at 3.5 to 3.75 per cent.
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In Canada, the energy price shock is unfolding against a backdrop of sluggish economic growth and heightened unemployment. U.S. tariffs have crimped exports and business investment, although the economy is being supported by resilient consumers and an increase in government spending by both Ottawa and the provinces.
The bank’s baseline forecast, published in its quarterly Monetary Policy Report on Wednesday, sees Canadian gross domestic product growing 1.2 per cent in 2026 and 1.6 per cent in 2027 – slightly higher than the January forecast.
Meanwhile, the bank upgraded its forecast for inflation, expecting it to average 2.3 per cent in 2026, up from the previous forecast of 2 per cent. It sees inflation peaking at around 3 per cent in April, before declining to 2.5 per cent in June and 2 per cent by early 2027.
Both the GDP and inflation forecasts are heavily contingent on fragile assumptions about oil prices and tariffs.
The baseline forecast – based on oil futures markets – assumes that Brent crude prices will gradually decline from US$90 a barrel in the second quarter to US$75 by mid-2027. The average tariff rate on Canadian goods shipped to the United States is assumed to remain at 5.1 per cent.
The challenge for the central bank is that risks to these assumptions lie on both sides, said Frances Donald, chief economist at Royal Bank of Canada.
“Inflation could be substantially higher if the energy shock persists and it starts bleeding into other goods and services. The flip side is that the trade war is an opposite shock, and if negotiations with CUSMA or deterioration in tariff policy come to fruition, then you could see the opposite: an economy that slows and inflation that deteriorates,” she said in an interview.
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“That makes the Bank of Canada’s job more complicated because much of what lies ahead will depend on policies set in rooms in Ottawa and Washington.”
The energy price shock itself is having a mixed impact on the Canadian economy. Higher oil prices boost exports and generate profits for energy companies and tax revenues for Ottawa and provincial governments. At the same time, consumers are squeezed at the gas pump, leaving them with less discretionary income to spend.
“Higher global oil prices are expected to have little impact on overall growth but will affect its composition,” the bank said in its Monetary Policy Report.
Alongside its main forecast, the bank outlined an “illustrative” scenario where oil prices remain at US$100 for the next few years. In this situation, inflation remains close to 3 per cent for the next two years. GDP growth is projected to be roughly the same as in the baseline scenario, with increased activity in the energy sector offset by several consecutive interest-rate hikes to try to contain inflation.
“There are many possible outcomes. Monetary policy may need to be nimble,” Mr. Macklem said.