Bank of Canada holds rate at 2.25%, signals small moves ahead

The Bank of Canada held its key interest rate at 2.25% on Wednesday, a move markets had fully priced in. Governor Tiff Macklem said the rate is roughly where it needs to be if the economy stays on track, but stopped short of ruling out future changes.

"If the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small," Macklem told reporters. "However, uncertainty is unusually elevated and there are many possible outcomes. Monetary policy may need to be nimble."

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Energy prices. The war in Iran has sent oil sharply higher, and the bank expects inflation to jump to about 3% in April from 2.4% in March. For now, the bank is "looking through" that spike — treating it as a temporary shock rather than a reason to hike. But if oil stays elevated, consecutive rate increases could follow.

Macklem was direct about the risk: "If oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing generalized inflation increases."

The picture isn't all bad for Canada. Higher oil prices boost export revenues even as they squeeze consumers. The bank lifted its 2026 growth forecast slightly to 1.2% from 1.1%, and sees inflation returning to its 2% target by early next year. Long-term inflation expectations remain anchored, and so far there's little sign that energy costs are bleeding into other goods and services.

The bank is assuming U.S. tariffs stay where they are and oil falls to $75 US per barrel by mid-2027. The next rate decision is June 10. Money markets don't expect a move then, but are pricing in one 25-basis-point hike by October.