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The Bank of Canada (BoC) held the overnight interest rate at 2.25 per cent, as it monitors the impacts of the war in Iran and Canada’s slowing economy.
The cautious move underscores the uncertainty at the moment, where an unstable energy market has led to rising gasoline prices just as CPI inflation fell to 1.8 per cent in February from 2.3 per cent in January.
The breadth and duration of the conflict in the Middle East, and its economic effects, are “highly uncertain,” the BoC said in its Wednesday morning announcement. “It’s too early to assess the impact of the conflict in the Middle East on growth in Canada.”
It also noted Canada’s flagging economy. The country’s GDP contracted by 0.6 per cent in Q4 2025, leading to an overall growth of 1.7 per cent in the year — the slowest pace of annual growth since 2020.
The BoC noted housing markets remain “weak,” contributing to the flagging economy even with a rise in consumer and government spending. Canada’s labour market was described as “soft,” with the unemployment rate rising to 6.7 per cent in February. The review of the CUSMA trade agreement also remains a question mark.
“We continue to expect the Canadian economy to grow modestly as it adjusts to U.S. tariffs and trade policy uncertainty,” the BoC said, “but recent data suggest that near-term economic growth will be weaker than anticipated in January.”
Inflation is near the target range and the economy is in excess supply, the BoC's governor Tiff Macklem said in the morning announcement, so the risk of higher energy prices quickly spreading to other goods and services is contained for now. But the risks could grow if the conflict in the Middle East expands and intensifies, he added.
Macklem highlighted the challenge of navigating the moment, where the BoC must balance keeping inflation within its target range while growing the economy.
While expecting the BoC to hold the overnight rate, Mark Fieder, the president of Avison Young Canada, said in an emailed statement to RENX Homes, there is a question of whether the central bank could hike interest rates later this year.
"This would not be surprising although, naturally, I would rather see interest rates lower, to stimulate investment opportunities – particularly in higher-performing sectors like multifamily, industrial and retail."
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