OTTAWA — The Bank of Canada is maintaining its key rate at its current level, 2.25%, as the economy performs below expectations, but the war in the Middle East poses the threat of higher inflation.
This choice of the central bank was expected by most economists. However, the direction the bank will take in its next decisions on the key rate is much less clear.
According to its governor, Tiff Macklem, the Bank of Canada is facing a dilemma.
On the one hand, trade uncertainty with the United States is keeping the economy at half-mast. On the other hand, the war in Iran is causing global oil prices to soar and risks leading to an increase in inflation in the coming months.
In prepared notes, Mr. Macklem says the central bank will not take into account the immediate inflationary impact of the war, but that its monetary policy makers will take steps to prevent a persistent rise in prices if the conflict prolongs.
Statistics Canada reported an economic contraction in the fourth quarter and significant job losses in February, meaning the economy is falling short of the central bank’s initial forecasts.
Macklem notes that recent data suggests the economy returned to growth in early 2026, but it is too early to tell how the war in Iran will affect growth.
He adds that the upcoming revision of the trade agreement between Canada, the United States and Mexico remains a big unknown.
