Bank of Canada expected to hold key rate as it grapples with Iran war shock

Bank of Canada Governor Tiff Macklem is seen during a news conference in Ottawa, Wednesday, March 18, 2026. THE CANADIAN PRESS/Adrian Wyld

OTTAWA — The Bank of Canada will share how it’s thinking about price pressures from the Iran war on Wednesday when it publishes a new monetary policy report and makes its next interest rate decision.

The central bank has held its benchmark rate steady at 2.25 per cent in three consecutive decisions. Most economists aren’t expecting monetary policy-makers will break that streak this week.

Financial market odds for another rate hold on Wednesday stood at over 93 per cent as of Friday, according to LSEG Data & Analytics.

RBC assistant chief economist Nathan Janzen said he’s expecting an interest rate hold from the Bank of Canada this week as monetary policy-makers keep a close eye on the impact of higher energy prices on inflation.

Heading into this year, many economists predicted signs of easing inflation and a modest economic recovery would keep the Bank of Canada on the sidelines while it waited for clarity in the trade dispute with the United States.

The outbreak of war in the Middle East in late February and an associated spike in global oil prices could disrupt those forecasts.

Last week, Statistics Canada offered an early look at how the Iran war was starting to affect inflation in March. The headline inflation rate jumped to 2.4 per cent in the month, up from 1.8 per cent in February.

Tony Stillo, director of Canadian economics at Oxford Economics, said there were reassuring signals in the Bank of Canada’s closely watched core inflation metrics.

“They seem to be a little softer than expected, which was probably welcome to the Bank of Canada,” he said.

Stillo said the bank faces the dual challenge of contending with a supply shock that could both weaken economic activity while pushing prices higher. In ordinary times, economic softness would be met with interest rate cuts, while high prices are matched with rate hikes.

Governor Tiff Macklem said after the central bank’s rate decision in March that it would look through the initial rise in inflation from the oil price shock but would act to ensure inflationary pressures don’t become entrenched.

Janzen said it will take a few months before knock-on effects from the war spread beyond gas prices into other pockets of the consumer basket.

Taming global commodity prices like oil is a task well outside the Bank of Canada’s reach. But Janzen argued the central bank can’t ignore energy-driven inflation forever, particularly if higher pump prices start to fuel higher inflation expectations.

Businesses that expect to face climbing prices from the Iran war might opt to pass those costs on to consumers, so rising inflation expectations can become a self-fulfilling prophecy.

The Bank of Canada published its own quarterly surveys of businesses and consumers last week, but that polling was largely conducted before the start of the Iran war. Limited followup surveys did show at least a moderate rise in inflation expectations over the short and medium terms tied to the conflict.

“Short-term expectations are built off of ... grocery store prices, gasoline prices. Those are going to rise, and appropriately so, because in the near term, there will be an uptick,” Stillo said.

“It’s the long-term inflation expectations that are key to the Bank of Canada, and they’ll be monitoring those.”

Some of the businesses polled in the followup surveys mentioned that their ability to pass on price increases was constrained by weak demand and the cost structure of their contracts.

The Bank of Canada will also be contending with lingering uncertainty over efforts to secure a lasting ceasefire in the Middle East and reopen the Strait of Hormuz, a critical passageway for oil from the Persian Gulf.

Stillo said he expects the central bank might outline a few different scenarios in its monetary policy report for how the Iran war could evolve. That’s the approach monetary policy-makers took a year ago when U.S. tariffs were first imposed on Canadian goods.

Another source of relative uncertainty for the Bank of Canada is fiscal policy. The federal government will table its spring economic outlook on Tuesday, a day before the rate decision.

Janzen said that even without much time to digest the latest fiscal update, the direction of federal policy has been fairly well telegraphed.

For instance, the governing Liberals paused the federal fuel excise tax for roughly four months starting last week, a move that economists expect will remove up to two tenths of a percentage point from headline inflation in the months ahead.

Janzen said that with the economy struggling to grow and the unemployment rate remaining elevated, the Bank of Canada is in a good position to hold its policy rate steady as it waits for more clarity on the Iran war.

“If you took away the oil price shock, if you took away the fiscal tailwinds that we’re expecting to start showing up more significantly this year, then there would be an argument that the Bank of Canada should be reducing interest rates,” he said.

“So on balance in our view, it leaves them in a holding pattern for the rest of this year with no interest rate changes.”

This report by The Canadian Press was first published April 27, 2026.

Craig Lord, The Canadian Press