The Bank of Canada announced on March 18 that it would keep its key interest rate unchanged at 2.25 percent. However, the central bank also warned that the ongoing war will push up inflation, and future trends remain highly uncertain, particularly under the influence of U.S. policy. The bank will continue to assess the combined effects of the war and U.S. trade policy on the economy.
In its press release, the Bank of Canada stated that, compared with the October Monetary Policy Report (MPR) forecast, the global and Canadian economic outlook has not changed significantly. Yet the outlook remains affected by unpredictable U.S. trade policies and geopolitical risks.
According to Canadian Press, Bank of Canada Governor Tiff Macklem said in his opening remarks at the March 18 rate announcement: “The Canadian economy is facing many challenges. And now, we are facing even greater volatility.”
Data from Statistics Canada showed that the inflation rate in February fell to 1.8 percent from 2.3 percent in January. However, much of the data cited by the central bank and Statistics Canada were collected before the U.S.-Israel airstrikes on Iran. Macklem noted: “For more than a year, Canada’s inflation rate has remained close to the 2 percent target. But, as we can see, the Iran war has caused oil prices to surge, which will push inflation up in the short term.”
In December, the CPI rose to 2.4 percent, mainly due to last winter’s GST/HST tax reduction base effect. Excluding tax changes, inflation has been falling since September. The Bank’s preferred core inflation measure dropped from 3 percent in October to about 2.5 percent in December. Inflation in 2025 was 2.1 percent, and the Bank expects inflation to remain close to the 2 percent target during the forecast period, with trade cost pressures offset by excess supply.
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Despite these warnings, the Bank has kept its policy rate unchanged for the third consecutive time. The rate was cut from 2.5 percent to 2.25 percent in October last year.
The Bank stated that the focus of monetary policy is to maintain inflation near the 2 percent target while helping the economy navigate this structural adjustment period. The Governing Council considers the current rate appropriate if the economic trajectory remains as expected. However, uncertainty is rising, and the Bank is closely monitoring risks. If the outlook changes, it is prepared to respond.
Rate decision driven by high uncertainty
After the announcement, market analysts noted that the central reason for keeping rates unchanged is not economic stability but “too much uncertainty.” On one hand, Canadian growth is slowing, and the labor market is weak, suggesting room for rate cuts; on the other, Middle East tensions are pushing up oil prices, raising the risk of inflation rebound. Caught between “slowing growth” and “rising inflation,” the Bank is choosing to wait for more data before acting.
Macklem said: “Weak economic growth coexists with rising inflation. This creates a dilemma for the central bank. Raising rates to curb inflation may further weaken the economy, while cutting rates to support growth could push inflation well above the target.”
The Bank of Canada will make its next rate decision on April 29, at which point it will also release the latest Monetary Policy Report with a more detailed economic outlook.
According to market and economist assessments, rates are likely to remain unchanged in the short term, but future direction is highly uncertain. If oil prices stay high, inflation pressure could force a rate hike; if U.S.-Canada trade relations deteriorate and the economy weakens further, a rate cut may be needed. In short, future rate decisions will depend less on single economic indicators and more on external factors, particularly oil prices and U.S. policy.
Uncertainty clouds economic outlook
In its latest monetary policy decision, the Bank of Canada painted a picture of an economy weaker than expected and facing new uncertainties due to the war.
The Bank warned that rising oil and gas prices from the Iran war will push up inflation in the short term. The impact of the war depends on the scale of oil price increases and the duration of the conflict. If energy prices remain high, broader effects on Canada’s economy could follow.
Governor Macklem said the Iran war adds a new layer of uncertainty, but it is too early to fully assess its impact on Canada’s economy.
He emphasized: if oil prices remain high for an extended period, Canadian revenue from oil exports could increase. However, higher oil prices will squeeze household and business budgets; consumers spending more on energy will spend less elsewhere, hurting overall consumption.
Another significant uncertainty is the upcoming CUSMA review. U.S. trade restrictions and uncertainty continue to drag on Canadian growth. After strong performance in Q3, GDP growth in Q4 may stagnate. Exports remain affected by U.S. tariffs. Employment has grown slightly in recent months, but the unemployment rate stays high at 6.8 percent, and business hiring intentions remain weak.
The Bank expects moderate short-term growth, weaker than early-year expectations. Consumption will remain stable, business investment will gradually strengthen, and fiscal policy will provide some support. Forecasts indicate 1.1 percent growth in 2026 and 1.5 percent in 2027, roughly in line with October’s projections.
Federal Reserve keeps rates unchanged
On March 18, the U.S. Federal Reserve held rates steady, maintaining its path of only one expected 0.25 percentage point cut in 2026, despite raising inflation forecasts. Policymakers expect inflation this year around 2.7 percent, higher than previously projected, largely due to the Middle East tensions pushing up oil prices. However, the Fed views these effects as uncertain and overall prefers a “wait-and-see” approach, expecting inflation to fall near the 2 percent target by 2027.
The Fed’s economic outlook remains relatively stable: unemployment is expected to hold at 4.4 percent, and 2026 GDP growth is slightly revised up to 2.4 percent. While officials generally see no need for rate hikes this year, internal disagreements remain. Overall, the Fed is cautiously pacing potential cuts amid inflation pressure and geopolitical risks.
ECB and BOE hold rates steady
AFP reports that on March 19, the European Central Bank (ECB) kept its deposit rate at 2 percent, in line with economist expectations. The ECB lowered its 2026 growth forecast, raised inflation expectations, and warned that the Middle East war could impact energy prices.
The ECB projects 2026 Eurozone GDP growth at 0.9 percent, down from December’s 1.2 percent forecast. It raised its inflation forecast to 2.6 percent, higher than the previous 1.9 percent.
The Bank of England (BOE) held its key rate at 3.75 percent on March 19, meeting market expectations. The BOE is closely monitoring the Middle East war’s effect on energy prices and the inflation outlook.
All nine members of the BOE Monetary Policy Committee voted unanimously to keep rates unchanged, the first unanimous decision since September 2021.
By Li Xin
