The Bank of Canada kept its benchmark interest rate steady at 2.25% on Wednesday, marking the fourth consecutive hold since a 0.25% cut in October 2025, as the ongoing war in Iran, now in its third month, drives energy price spikes and global economic uncertainty.
Governor Tiff Macklem acknowledged the challenging landscape, pointing to geopolitical tensions and volatile financial conditions shaped by daily developments in the Middle East. “Canada is being buffeted by global events and geopolitical uncertainties, but our economy is growing and is expected to grow,” Macklem said in prepared remarks.
The central bank highlighted the Iran conflict as a primary driver of economic strain, with Iran’s blockade of the Strait of Hormuz—a critical passage for 20% of global oil supply—and strikes on Persian Gulf energy sites pushing Brent crude to $109 per barrel.
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This energy crisis has reverberated through Canada’s economy. Inflation climbed to 2.4% in March, up from 1.8% in February, fueled largely by soaring fuel costs tied to the Middle East turmoil. Excluding gasoline, inflation eased slightly to 2.2%, but food prices jumped sharply, with store-bought food rising 4.4% and fresh vegetables surging 7.8% in the same month. Canadian consumers are feeling the pinch at gas pumps and grocery stores, as food suppliers tack on fuel surcharges to offset transportation disruptions.
Despite these pressures, the Bank of Canada projects GDP growth of 1.5% for the first quarter of 2026, following a contraction in the final quarter of 2025. Longer-term forecasts peg growth at 1.2% for 2026, rising to 1.6% in 2027 and 1.7% in 2028. Macklem noted that higher oil prices could partially offset domestic economic drag by boosting the value of Canada’s energy exports, though he cautioned that projections hinge on oil prices cooling to around $75 per barrel by mid-2027 and U.S. tariffs holding steady.
For the mortgage sector, the rate hold was widely anticipated. A recent poll showed 85% of industry respondents expecting no change, and TD’s Steve Ng confirmed the decision is unlikely to shift mortgage rates in the near term. Fixed rates have edged up slightly due to bond yield movements, creating some consumer unease, but Ng expects a pause for several months as the central bank monitors global events.
The Bank of Canada’s cautious stance aligns with other major central banks, including the Federal Reserve and the Bank of England, both expected to hold rates steady this week. With the next rate announcement set for June 10, the central bank’s path forward remains tied to whether U.S. and Iranian negotiators can secure a truce to stabilize energy markets.
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