The Bank of Canada kept its policy rate unchanged at 2.25% for the fifth consecutive meeting, citing a deteriorating growth outlook and rising inflation risks stemming from the conflict in the Middle East.
The decision was widely in line with market expectations heading into the announcement.
Key Takeaways
- Rate held at 2.25%, unchanged since October 2025, as the Bank balances downside risks to growth against upside risks to inflation.
- War in Iran adds new uncertainty, as the conflict has driven sharp increases in global oil and natural gas prices, tightened financial conditions, and introduced the risk of broader supply disruptions via the effective closure of the Strait of Hormuz.
- Growth is weakening with a 0.6% GDP contraction in Q4 2025, early 2026 data point to continued sluggish expansion, below the pace forecast in the January MPR. The unemployment rate rose to 6.7% in February.
- Inflation is close to target for now, as CPI eased to 1.8% in February from 2.3% in January. However, higher gasoline prices are expected to push headline inflation back up in the coming months.
- A policy dilemma is emerging: the combination of economic weakness and rising inflation puts the BoC in a difficult position: easing risks stoking inflation above target, while tightening risks further dampening an already soft economy.
The Governing Council acknowledged that the Canadian economy “continues to face heightened uncertainty” related to U.S. trade policy and that the war in Iran has added a fresh layer of complexity. The conflict’s impact on the Canadian and global economies will depend on its duration and geographic spread, factors the Bank described as “highly uncertain.”
The statement also flagged the Canada-U.S.-Mexico Agreement (CUSMA) review as a “big unknown” weighing on the medium-term outlook.
On the domestic front, Q4 2025 GDP came in weaker than the Bank had projected in January, though largely due to a larger-than-expected drawdown in inventories. The labor market has softened noticeably: employment gains from late 2025 were “largely reversed” in January and February, with the unemployment rate climbing to 6.7%.
The inflation picture is a tale of two forces. Core and headline measures had been converging toward the 2% target, with February’s CPI print coming in at 1.8%. But the sharp rise in global energy prices since the outbreak of the Middle East conflict is already showing up at the pump and is expected to push total CPI higher in the near term.
Link to official Bank of Canada Statement (March 2026)
During the press conference, Governor Macklem framed the BOC’s approach as one of deliberate patience: the Bank will “look through” the war’s immediate inflationary impact, but made clear it will not allow energy price pressures to “broaden and become persistent inflation.”
Market Reaction
Canadian Dollar vs. Major Currencies: 5-min
Overlay of CAD vs. Major Currencies – Chart Faster with TradingView
Loonie pairs had already been trading mixed leading up to the actual BOC decision at 10:00 pm ET, with the oil-related currency drawing support from the energy commodity’s rally then. CAD had a brief bullish reaction across the board to the BOC’s decision to keep policy unchanged, though some gains were returned during the presser.
Still, CAD resumed a shallow bullish trajectory after the BOC event, reflecting some relief that the central bank refrained from pivoting back to a more dovish stance given the tariffs-related and geopolitical uncertainties.
A steeper climb followed towards the end of the U.S. session, except against the stronger Greenback, as elevated crude oil prices provided strong tailwinds.
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