The Bank of Canada held its key interest rate at 2.25 per cent on Wednesday, saying weaker domestic growth is being offset by rising inflation risks tied to the war in the Middle East and higher energy prices.
The central bank kept its target for the overnight rate unchanged, with the bank rate at 2.5 per cent and the deposit rate at 2.2 per cent.
In its statement, the Bank of Canada said the conflict in the Middle East has increased volatility in global energy markets and financial conditions, while also adding uncertainty to the global economic outlook.
It said oil and natural gas prices have risen sharply since the outbreak of the war, a move that is expected to lift inflation in the near term. The bank also warned that supply disruptions and transportation bottlenecks linked to the effective closure of the Strait of Hormuz could affect other commodities, including fertilizer.
But it added: "The breadth and duration of the conflict, and hence its economic impacts, are highly uncertain."
At the same time, the bank pointed to a weaker-than-expected backdrop at home.
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In his own statement released today, Bank of Canada Governor Tiff Macklem said: "Canada’s economy is dealing with a lot, and now we face more volatility. The Bank of Canada’s role is to be a source of stability. We’re supporting economic activity while ensuring that a jump in energy prices doesn’t turn into persistent inflation."
He added: "Relative to our January forecast, risks to economic growth are tilted to the downside. Near-term growth looks weaker than expected and the review of the Canada-United States-Mexico Agreement is a big unknown. At the same time, risks to inflation are tilted to the upside, because of the sharp increase in energy prices."
After the Canadian economy grew at an annualized pace of 2.4 per cent in the third quarter of last year, real gross domestic product contracted by 0.6 per cent in the fourth quarter. The bank said that was weaker than it had expected in January, though much of the decline reflected a larger-than-expected drawdown in inventories.
It said domestic demand still grew by more than two per cent, helped by consumer and government spending, even as the housing market remained weak.
The bank said it still expects modest growth as the economy adjusts to U.S. tariffs and trade uncertainty, but recent data suggest near-term activity will be softer than anticipated.
The labour market has also weakened. Employment gains late last year were largely erased in the first two months of 2026, and the unemployment rate climbed to 6.7 per cent in February. The bank added that recent trade data continue to suggest weakness in exports.
Inflation, meanwhile, eased to 1.8 per cent in February from 2.3 per cent in January. The central bank said measures of core inflation and inflation excluding indirect taxes have also moved down and are now close to two per cent.
But it cautioned that food inflation, while slower in February, remains elevated, and that the recent jump in global energy prices is expected to push headline inflation higher in the coming months through gasoline costs.
“Risks to growth look tilted to the downside,” the bank said, while adding that inflation risks have increased because of higher energy prices.
The decision had been widely expected by economists, who had pointed to mixed domestic data and a growing global oil shock as reasons for the central bank to stay on hold.
The Bank of Canada said it will continue to assess the effects of U.S. tariffs and trade uncertainty, as well as the impact of the Middle East conflict on growth and inflation.
Its next scheduled interest rate announcement is set for April 29, when it will also release its next Monetary Policy Report.
