The Bank of Canada maintains its interest rate policy heading into spring

  • First National Financial LP

The Bank of Canada is ushering in the spring by keeping its benchmark interest rate at 2.25%. This determination was widely expected by economists despite some very recent changes in the economic indicators that the Bank uses as part of its deliberations.  A summary of the Bank’s observations and rationale follows.

Canadian Economic Performance

  • GDP in Canada contracted 0.6% in the fourth quarter of 2025
  • This was weaker than expected at the time of the Bank’s January Monetary Policy Report (MPR), mainly because of a larger-than-expected drawdown in inventories
  • Domestic demand grew by more than 2% due to strength in consumer and government spending, even as housing markets remained weak
  • Canada’s labour market remains soft as employment gains in the fourth quarter of 2025 were largely reversed in the first two months of 2026, and the unemployment rate rose to 6.7% in February

Canadian Inflation and Outlook

  • Inflation, measured by the Consumer Price Index (CPI), “eased further” to 1.8% in February, down from 2.3% in January
  • CPI inflation excluding changes in indirect taxes as well as core inflation measures have also come down and are all “close” to 2%
  • Food inflation slowed in February but remains elevated
  • The sharp increase in global energy prices has led to increases in gasoline prices, and this will push up total inflation in the coming months

Bond Markets, Credit Spreads and F/X

  • Global bond yields have risen, equity market prices have declined, and credit spreads have widened
  • The Canada-US dollar exchange rate has remained relatively stable

Global Economic Commentary

  • Prior to war in the Middle East, the global economy was on pace to grow at around 3%, as expected in the January MPR
  • Economic growth in the United States has moderated but remains “solid,” driven by consumption and strong AI-related investment
  • US inflation remains above target and has evolved largely as expected
  •  In the euro area, domestic demand is supporting growth while exports have contracted
  • China’s economy continues to be boosted by strength in exports, but domestic demand remains weak

War in the Middle East Increases Volatility; Too Early to Assess Impact on Canada

The Bank made special mention of increased volatility in global energy prices and financial markets caused by war in the Middle East, noting that this development has “heightened the risks to the global economy.” The conflict’s breadth and duration, and “hence its economic impacts” are “highly uncertain.” As a result, the Bank said it is too early to assess the impact of the conflict in the Middle East on growth in Canada.

Rationale for Today’s Decision and Outlook

In commenting on its decision to hold its policy rate steady, the BoC made several comments:

  • Since the outbreak of the conflict in the Middle East, global oil and natural gas prices have risen sharply, and this will boost global inflation in the near-term
  • In addition to energy supply disruptions, transportation bottlenecks stemming from the effective closure of the Strait of Hormuz could impact the supply of other commodities, such as fertilizer
  • Financial conditions have tightened from accommodative levels.

Against this overall backdrop, the BoC’s Governing Council decided to maintain the policy rate at 2.25%. With recent data pointing to weaker economic activity and uncertainty elevated, risks to growth look “tilted to the downside.” At the same time, inflation risks have gone up due to higher energy prices. The Bank said it will continue to assess the impact of US tariffs and trade policy uncertainty, and how the Canadian economy is adjusting. It will also monitor the unfolding conflict in the Middle East closely and assess its impact on growth and inflation.

The Bank added that it continues to expect the Canadian economy to “grow modestly” as it adjusts to US tariffs and trade policy uncertainty, but it also acknowledged that “recent data suggest that near-term economic growth will be weaker than anticipated in January.” Looking through the volatility, the Bank also said that recent data suggest ongoing weakness in exports.

Final Comments

The Bank offered that as the outlook evolves, “we stand ready to respond as needed” with a  commitment to ensuring that Canadians “continue to have confidence in price stability through this period of global upheaval.”

Next up

The Bank is scheduled to make its next policy interest rate announcement on April 29th. First National’s executive summary will follow. In the meantime, please visit the Resources page of this website for other important insights.

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