The Bank of Canada held its benchmark interest rate at 2.25 per cent today as the economy performs below expectations but war in the Middle East threatens higher inflation.

The central bank’s decision to keep to the sidelines today was widely expected but the future path for the policy rate is much less clear.

Governor Tiff Macklem says in prepared remarks that the Bank of Canada is in a “dilemma” with U.S. trade uncertainty keeping the economy soft but the Iran war sending global oil prices surging and likely spurring higher inflation in the months to come.

Macklem says the central bank will look through the immediate inflationary hit from the war but monetary policymakers will move to prevent persistent price hikes if the conflict persists or broadens.

Statistics Canada reported an economic contraction in the fourth quarter of the year and sharp job losses in February, which mean the economy is undershooting the central bank’s initial forecasts.

Macklem says recent data suggest the economy was growing again to start 2026 but it’s too early to say how the war in Iran will affect growth and the upcoming review of the Canada-U.S.-Mexico trade agreement is still a “big unknown.”

More to come…