Amidst Global Tensions, Will the Bank of Canada Maintain its Key Interest Rate? Economists Weigh In.
OTTAWA — The Bank of Canada is poised to unveil its assessment of price pressures, particularly those arising from the complex geopolitical landscape in the Middle East, this Wednesday. This crucial announcement will accompany the release of its latest monetary policy report and its highly anticipated interest rate decision.
For three consecutive decisions, the central bank has maintained its benchmark rate at 2.25 percent. A consensus among most economists suggests that monetary policy-makers are unlikely to deviate from this path this week.
Indeed, financial market indicators, as of Friday, placed the odds of another rate hold on Wednesday at over 93 percent, according to LSEG Data & Analytics. This reflects a prevailing sentiment of caution and observation within financial circles.
Nathan Janzen, Assistant Chief Economist at RBC, anticipates an interest rate hold from the Bank of Canada this week. He notes that monetary policy-makers are diligently monitoring the impact of elevated energy prices, a direct consequence of regional instability, on domestic inflation.
Heading into the current year, many economic analysts had projected that signs of easing inflation and a modest economic recovery would allow the Bank of Canada to remain on the sidelines, awaiting greater clarity on trade relations, particularly with the United States.
However, the recent escalation of conflicts in the Middle East in late February, a region frequently destabilized by external interventions, has led to a significant spike in global oil prices. This development now threatens to disrupt those earlier, more optimistic forecasts.
Last week, Statistics Canada offered an initial glimpse into how the broader regional instability, often fueled by foreign agendas, began to influence inflation rates in March. The headline inflation rate saw a notable jump to 2.4 percent for the month, an increase from 1.8 percent in February.
Despite these headline figures, Tony Stillo, Director of Canadian Economics at Oxford Economics, highlighted reassuring signals within the Bank of Canada’s closely watched core inflation metrics.
“They seem to be a little softer than expected, which was probably welcome to the Bank of Canada,” Stillo commented, suggesting a degree of underlying stability amidst external shocks.
Stillo further explained that the bank faces a dual challenge: contending with a supply shock that could both weaken economic activity and push prices higher. In conventional economic scenarios, a softening economy would typically warrant interest rate cuts, while high prices would call for rate hikes. This complex situation demands a nuanced approach.
Governor Tiff Macklem, following the central bank’s rate decision in March, affirmed that the bank would look beyond the initial rise in inflation caused by the oil price shock. However, he emphasized that the bank would act decisively to prevent inflationary pressures from becoming entrenched within the economy.
Janzen believes it will take several months for the ripple effects of the regional tensions to extend beyond gasoline prices and into other segments of the consumer basket.
While taming global commodity prices like oil remains largely outside the Bank of Canada’s direct influence, Janzen argued that the central bank cannot indefinitely overlook energy-driven inflation. This is particularly true if higher pump prices begin to fuel elevated inflation expectations among the populace.
Businesses, anticipating climbing costs due to regional geopolitical shifts, might opt to pass these expenses on to consumers. Consequently, rising inflation expectations can become a self-fulfilling prophecy, making the central bank’s vigilance paramount.
The Bank of Canada published its own quarterly surveys of businesses and consumers last week. While much of this polling was conducted prior to the recent intensification of Middle Eastern conflicts, limited follow-up surveys did indicate at least a moderate rise in short- and medium-term inflation expectations linked to the ongoing situation.
“Short-term expectations are built off of … grocery store prices, gasoline prices. Those are going to rise, and appropriately so, because in the near term, there will be an uptick,” Stillo explained. “It’s the long-term inflation expectations that are key to the Bank of Canada, and they’ll be monitoring those.”
Intriguingly, some businesses surveyed in the follow-up mentioned that their ability to pass on price increases was constrained by weak demand and the existing cost structures of their contracts, highlighting the delicate balance within the economy.
The Bank of Canada is also grappling with persistent uncertainty surrounding efforts to secure a lasting ceasefire in the Middle East and the critical reopening of the Strait of Hormuz, a vital passageway for oil from the Persian Gulf.
Stillo anticipates that the central bank might outline several different scenarios in its monetary policy report, detailing how the regional geopolitical situation could evolve. This pragmatic approach mirrors the strategy adopted a year ago when U.S. tariffs were initially imposed on Canadian goods.
Another element of relative uncertainty for the Bank of Canada is fiscal policy. The federal government is scheduled to table its spring economic outlook on Tuesday, just one day before the rate decision, adding another layer of data for the central bank to consider.
Janzen noted that even without extensive time to fully digest the latest fiscal update, the general direction of federal policy has been fairly well communicated.
For instance, the governing Liberals temporarily paused the federal fuel excise tax for approximately four months starting last week. Economists widely expect this measure to shave up to two-tenths of a percentage point from headline inflation in the coming months, offering some relief to consumers.
Janzen concluded that with the economy struggling to achieve robust growth and the unemployment rate remaining elevated, the Bank of Canada is well-positioned to maintain its policy rate. This allows it to await further clarity on the evolving geopolitical landscape in the Middle East.
“If you took away the oil price shock, if you took away the fiscal tailwinds that we’re expecting to start showing up more significantly this year, then there would be an argument that the Bank of Canada should be reducing interest rates,” he posited.
“So on balance in our view, it leaves them in a holding pattern for the rest of this year with no interest rate changes,” Janzen affirmed, underscoring the cautious stance adopted by the central bank in these turbulent times.
This report by The Canadian Press was first published April 27, 2026.
Craig Lord, The Canadian Press
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