The Bank of Canada (BoC) today has decided to leave its benchmark interest rate at 2.25%. This was widely expected by market experts & economists alike.

Recent Canadian Economy Indicators

• GDP in Canada contracted 0.6% in the fourth quarter of 2025 – this would normally suggest that their Key Rate should be cut
• Domestic demand grew by more than 2% due to strength in consumer and government spending, but the housing markets remained weak
• A weak Canadian labour market remains weak as employment gains in the fourth quarter of 2025 were largely reversed in the first two months of 2026. The unemployment rate has risen to 6.7% in February – this would suggest a rate cut would be in order.

Canadian Inflation and Outlook

• 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) and core inflation have also come down and are all “close” to 2%
• Food inflation slowed in February, but remains an issue
• Sharp increases in global energy prices have led to increases in gasoline prices, and the BoC believes that this will push up total inflation in the coming months

Global Economy

• US inflation remains above target as expected
• U.S. economic growth has moderated but remains “solid,” driven by consumption and strong tech investment
• Prior to the conflict in the Middle East, the global economy was anticipated to grow at around 3%, as expected in the January MPR
•  The European economy has seen domestic demand growing, while exports have not grown
• China’s is the reverse of the European economy: strength in exports, with domestic demand weak

Fixed Rate Markets and Forex

• Bond yields have risen, equity market prices have declined very recently, and credit spreads have widened
• The Canada-US dollar exchange rate remains relatively stable, with the Canadian dollar remaining weak, a continued productivity issue for Canada.

BoC says it’s too Early to assess the impact on Canada of the war in the Middle East

The BoC commented on increased volatility in global energy prices and financial markets from the recent conflict in the Middle East.  It has “heightened the risks to the global economy,” and  “hence its economic impacts” are “highly uncertain.” As a result, the Bank stated that it is too early to assess the impact of the conflict in the Middle East on the  Canadian economy.

BoC’s Reasoning for Today’s Decision

Some of the BoC comments, for its decision to hold its policy rate steady:

• “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”

The BoC 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 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.” The BoC also said that recent data suggest ongoing weakness in exports.

Summary

The problem we see here is that in times of economic weakness, the BoC should be cutting its’ Key Benchmark Rate.

Of course, the BoC’s paramount responsibility is to ensure that Canadians “continue to have confidence in price stability through this period of global upheaval.” They anticipate that inflation will become more of an issue.  Let’s hope that their crystal ball is right, else Canada needs an economic rate cut incentive.