The Bank of Canada’s decision to hold rates reflects a delicate balancing act between rising inflation pressures driven by global conflict and a weakening domestic economy, says CPA Canada’s chief economist David-Alexandre Brassard.
“Inflation was trending in the right direction at the start of 2026 with core measures moving closer to the Bank’s two per cent target and demand showing signs of softness,” said Brassard.
“But the war in Iran has significantly altered that outlook, with oil prices jumping roughly 40 per cent and consumers already seeing increases of 15 to 20 per cent at the pump.”
The surge in oil prices is expected to ripple through the economy, increasing transportation costs and putting renewed upward pressure on the price of goods in the months ahead, effectively erasing the relief Canadians saw following the removal of the carbon tax in 2025, he said.
At the same time, Canada’s economic fundamentals remain fragile, he noted.
GDP contracted in the fourth quarter, more than 100,000 private sector jobs have been lost in 2026, and both the housing sector and international trade continue to underperform.
“With clear signs of economic weakness and the risk of a deeper slowdown growing, moving pre-emptively on interest rates would be a significant gamble,” said Brassard. “While persistent oil-driven inflation could eventually force the Bank to prioritize price stability, we’re not at that point yet.”
After expanding by 2.4% in the third quarter of last year, GDP in Canada contracted 0.6% in the fourth quarter, said the Bank in a statement, adding that domestic demand grew by more than 2% due to strength in consumer and government spending, even as housing markets remained weak.
“We continue to expect the Canadian economy to grow modestly as it adjusts to US tariffs and trade policy uncertainty, but recent data suggest that near-term economic growth will be weaker than anticipated in January. The labour market remains soft. Employment gains in the fourth quarter of 2025 were largely reversed in the first two months of 2026, and the unemployment rate rose to 6.7% in February. Looking through the volatility, recent data also suggest ongoing weakness in exports. It’s too early to assess the impact of the conflict in the Middle East on growth in Canada,” it said.
“CPI inflation eased further to 1.8% in February, down from 2.3% in January. CPI inflation excluding changes in indirect taxes as well as core inflation measures have also come down and are all close to 2%. Food inflation slowed in February but remains elevated. The sharp increase in global energy prices has led to increases in gasoline prices, and this will push up total inflation in the coming months.
“With recent data pointing to weaker economic activity and uncertainty elevated, risks to growth look tilted to the downside. At the same time, inflation risks have gone up due to higher energy prices. We will continue to assess the impact of US tariffs and trade policy uncertainty, and how the Canadian economy is adjusting. We are also monitoring the unfolding conflict in the Middle East closely and assessing its impact on growth and inflation. As the outlook evolves, we stand ready to respond as needed. The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”
Andrew Hencic, Senior Economist, TD, said the BoC stayed on hold as expected and highlighted the uncertainty coming from the energy shock.
“The emphasis on keeping inflation pressures from spilling over from energy to other categories was to be expected. What matters in the coming months will be how the assessment and identification of those spillovers are communicated,” he said.
“The war in the Middle East is the dominant factor here. How long it disrupts supplies of energy products and other goods is the determinant of how big the associated inflationary impact will be. The BoC is focused on the pass-through to core prices and any shifts to inflation expectations. Given a domestic economic backdrop that has featured still-elevated unemployment, softening core inflation and growth risks “tilted to the downside”, we expect the Bank of Canada to stay on the sidelines, for now. However, uncertainty is high and the supply shock could easily escalate, broadening inflation beyond energy prices. In the event that both core inflation and inflation expectations drift higher we would expect the BoC to be ready to respond.”
Doug Porter, Chief Economist, BMO Capital Markets, said: ”Like all central banks, the conflict in Iran has put the BoC in a tough spot, with growth risks tilted to the downside, while inflation risks have mounted. The Bank suggests it’s still too early to properly assess the net impact on the Canadian economy. Policy is thus on hold until there’s more information on the duration and extent of the energy price shock. It’s also abundantly clear that the BoC was more concerned about the outlook prior to the war, and would have been even more dovish in (Wednesday’s) statement were it not for the spike in oil prices.”
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