The Bank of Canada held its benchmark interest rate at 2.25 per cent today, as a weakening economy collides with rising inflation risks from the war in the Middle East. 

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.

“We knew 2026 was going to be harder,” said David-Alexandre Brassard, chief economist at CPA Canada. 

Brassard said Canada’s growth outlook is weakening as as key supports fade. While trade carve-outs under existing agreements helped shield the economy from tariffs in 2025, he said that effect has largely plateaued. At the same time, slower population growth is reducing demand, while governments have limited fiscal room to boost spending. 

Slower population growth is also weighing on housing market reducing remand in already expensive regions such as Toronto and Vancouver. While Brassard noted that housing markets varies in regions, weaker population gains and softer economic conditions are making it harder to sustain home sales and price growth, further contributing to a broader slowdown in the sector.   

Given the weak economic backdrop, Brassard said he expects the Bank of Canada to hold rates in the near term.

He explains that raising rates now would mean acting “ahead of time” to curb future inflation, but doing so could further weaken economic growth.

“You want to work not only on the inflation itself by reducing rates, but you also look at inflation expectations,” Brassard said. 

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.”

Brassard added any shift in interest rates is more likely to come later in the year, potentially June or July, when there is greater clarity on trade conditions. 

“Depending on that front, they [Bank of Canada] may stay on pause until we know what’s happening on the U.S. side… unless the oil disruptions are having inflation impacts that are too significant,” he said. 

The Bank of Canada is set to make its next interest rate decision and its next Monetary Policy report on April 29. 

With files from the Canadian Press