Based on coverage from The Star, The Hamilton Spectator, and Lethbridge News Now.
The Bank of Canada is expected to keep its key interest rate unchanged at 2.25 per cent on Wednesday, but the calm is starting to feel a little fragile. A new oil-price shock tied to the war involving Iran is pushing inflation risks higher at the same time Canada’s economy is showing real signs of strain.
While the Bank of Canada maintains its key interest rate amid rising inflation risks, it is worth noting that the inflation rate recently fell to 2.3% as gas prices dropped significantly, providing some context to the current economic landscape in Canada. For more details, see our coverage on the recent decline in Canada’s inflation rate.
Markets were pricing better than 90 per cent odds of a hold as of Friday, using LSEG data cited by both the Toronto Star and The Canadian Press. The bigger question is what comes next, and whether the Bank will start sounding more worried about inflation, growth, or both.
Bank of Canada rate decision in Ottawa
Economists surveyed by the Star said it’s too soon for the Bank to move off the sidelines, even with oil prices rising. RBC’s Claire Fan told the Star the Bank likely won’t respond “anytime soon without greater clarity” on the conflict, adding she doesn’t think it should.
Governor Tiff Macklem has been signalling caution for months. In January, he pointed to how uncertainty makes it harder to map the path for interest rates and said the Bank was “monitoring risks closely” and prepared to respond if the outlook changes.
That same uncertainty is now coming from two directions at once: weakening domestic data and a sudden global commodity shock.
Middle East war drives oil and inflation risk
The economic worry is pretty straightforward: higher oil prices can filter through to the cost of transporting goods, heating, and making just about everything, pushing up prices well beyond the gas pump.
The Canadian Press report adds detail on what’s driving that spike, saying Iran has attacked commercial ships in the Persian Gulf and moved to blockade the Strait of Hormuz, where about a fifth of the world’s oil transits. BMO chief economist Doug Porter told CP that higher energy costs are already lifting Canadian pump prices and are likely to push inflation higher in coming months.
Porter also flagged knock-on effects: packaging and transportation costs for food, plus potential pressure on fertilizer inputs tied to Gulf shipments. StatCan put food inflation at 7.3 per cent year-over-year in January, and Porter said the war could aggravate already “uncomfortably high” food inflation.
Canadian jobs report shows rising unemployment
While inflation risks are heating up, the jobs picture cooled fast. Statistics Canada’s February labour force report showed the unemployment rate rose to 6.7 per cent. On job losses, the coverage differs slightly: the Star said the economy shed “more than 80,000” positions, while CP put the decline at 84,000 jobs.
Either way, it’s a serious hit and one reason some market odds for a cut “rose marginally” after the report, according to CP.
There’s also weakness in recent growth numbers. CP says Statistics Canada reported the economy contracted at a 0.5 per cent annualized pace in the fourth quarter of 2025, undershooting the Bank’s call for flat growth.
What February inflation data may (not) change
Fresh inflation data lands Monday, but economists aren’t expecting it to force the Bank’s hand this week. The Star notes February’s figures will mostly reflect the period before the Feb. 28 attack on Iran by the U.S. and Israel.
Porter told CP inflation could come in as low as 1.8 per cent, partly because comparisons are being distorted by the federal government’s earlier “tax holiday” dropping out of the year-over-year math.
April could be a different story. Porter said April’s inflation reading may spike thanks to comparisons with the previous year, when the federal Liberals cancelled the consumer price on carbon, which he said took roughly 18 cents off a litre of gas at the time.
Rate hold now, but markets eye late-2026 hike
Even with a hold looking likely Wednesday, markets are getting more open to a hike later in 2026. The Star cited LSEG pricing of roughly 50 per cent odds of a hike by September and 80 per cent odds by December.
TD’s Andrew Hencic told the Star that if energy prices rise quickly and stay high, it becomes a “substantial supply shock” that can threaten inflation expectations, which is when rate hikes start getting discussed more seriously. Still, both Hencic and Fan told the Star they currently expect the policy rate to stay at 2.25 per cent through 2026.
Others are less convinced a hike is the right move. Porter argued to both outlets that oil shock pressure can raise inflation while also damping growth, and he questioned the wisdom of hiking when the economy is already struggling. Desjardins deputy chief economist Randall Bartlett told CP a quarter-point hike priced in by markets before year-end looks premature, and he expects the Bank to “look through” an oil shock if it proves temporary.
Wednesday’s decision is one thing. The real tell may be how Macklem talks about the war, oil, and the Bank’s tolerance for a short-term inflation bump versus a weaker Canadian economy.
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