The Bank of Canada has decided to keep its benchmark interest rate unchanged at 2.25 percent for the third consecutive policy meeting, as growing geopolitical tensions in the Middle East cast uncertainty over the global economic outlook.
Speaking on March 18, Bank of Canada Governor Tiff Macklem acknowledged that the ongoing conflict involving Iran is already influencing global markets, particularly energy prices. He noted that the sharp rise in oil prices is expected to push inflation higher in the short term, adding new pressure on Canadian households.
Oil prices have climbed close to US$100 per barrel following military actions initiated by the United States and Israel on February 28, and Iran’s subsequent retaliation. The situation has intensified after Iran moved to restrict access through the Strait of Hormuz a vital route for global oil shipments and launched attacks on energy infrastructure in parts of the Gulf region.
The central bank highlighted that the conflict has introduced significant uncertainty into both energy and financial markets. Beyond oil, disruptions in shipping routes could also affect the supply of key commodities such as fertilizer, further contributing to inflationary pressures worldwide.
However, the Bank noted that higher oil prices may bring some economic benefits domestically, particularly for oil-producing regions like Alberta, where increased export revenues could provide a boost.
Despite four interest rate cuts earlier in 2025, the Bank has maintained its current rate since October, indicating that it remains appropriate for managing inflation near its target. Still, policymakers are navigating a complex situation. While economic growth risks have shifted downward, persistent high energy prices could push inflation upward again.
Macklem described the current situation as a “dilemma” for policymakers. Raising interest rates to control inflation could further weaken an already slowing economy, while lowering rates to stimulate growth risks pushing inflation above the Bank’s 2 percent target.
Recent data shows inflation easing slightly, with annual inflation dropping to 1.8 percent in February from 2.3 percent in January. However, the Bank expects inflation to rise again in the coming months due to increasing gasoline prices.
At the same time, Canada’s labour market has shown signs of weakness. The economy lost 84,000 jobs in February, following losses in January, pushing the unemployment rate up to 6.7 percent.
Globally, the economic outlook remains mixed. Before the escalation in the Middle East, the global economy was projected to grow at around 3 percent. The United States continues to show strong growth with inflation slightly above target, while the European Union faces stable domestic demand but weaker exports. China, meanwhile, is experiencing strong export performance but sluggish domestic consumption.
Looking ahead, the Bank of Canada will announce its next interest rate decision on April 29, alongside its updated Monetary Policy Report. Policymakers are expected to closely monitor both inflation trends and geopolitical developments before making their next move.
