The Bank of Canada held its policy rate at 2.25%, maintaining the level it has kept in place since October.
The Bank said its outlook for growth “has not changed significantly since our January projection,” despite global shocks. It noted that higher oil prices alter the composition of growth, but have only a small net effect on the total.
The Monetary Policy Report projects that GDP growth will be “1.2% in 2026 and 1.6% in 2027,” with inflation returning to target as oil prices ease. The Bank’s estimates of the range for the neutral rate were unchanged at 2.25% to 3.25%, while potential GDP was revised marginally higher on past upward revisions to GDP and the capital stock, and some assumed positive impacts from AI adoption.
Higher energy prices are expected to cause CPI inflation to “peak around 3% in April and ease back to the 2% target by early next year.” While near‑term inflation expectations have moved up due to gasoline and food prices, the Bank emphasized that, “[a]s expected, there is little evidence that higher oil prices have fed through to other goods and services prices more broadly,” but that this needs to be closely monitored. It also noted that longer‑term expectations remain anchored.
Governing Council judged that “a policy rate close to current settings looks appropriate” if oil prices decline and tariffs remain unchanged. However, risks are elevated, noting that should “significant new trade restrictions” be imposed on Canada by the U.S., more cuts may be needed. Conversely, if oil prices continue to rise, and remain elevated, “the risk that higher energy prices become ongoing generalized inflation increases” raising the prospect for “consecutive increases in the policy rate”.
Key Implications
As expected, the Bank of Canada (BoC) stayed put. Inflation readings are due to pick up as the energy shock gradually propagates through the economy. However, they are starting from a good place as near-term measures of core inflation have trended well within the target range, and the labour market has remained soft. These factors underpin a softer starting point for inflation and the risks the BoC is looking to confront.
From our lens, the outlook has only gradually shifted. The BOS survey suggested some upside to business confidence, but the outlook for firms remains very murky. The worry is what happens with energy prices. Our expectation (like the BoC’s) is that prices peak this quarter and gradually fall, taking pressure off inflation and allowing the BoC to stay on hold at the lower end of their neutral range. Of course, the risks to the outlook at high, and remain contingent on the course of the Middle East conflict.
