Bank of Canada holds key rate at 2.25% amid Middle East conflict and inflation risks

The central bank said heightened geopolitical tensions, particularly the Iran war, have pushed up energy prices and disrupted transportation, adding pressure to global inflation while dampening growth prospects in oil-importing economies.

Despite the external risks, the bank maintained its outlook for Canada’s economy, projecting modest growth of 1.2% in 2026, rising to 1.6% in 2027 and 1.7% in 2028.

Consumer and government spending continue to support activity, though exports and business investment remain constrained by tariffs and trade uncertainty.

Inflation rose to 2.4% in March, largely due to higher gasoline prices, and is expected to climb further to around 3% in April. However, the bank said underlying inflation remains relatively stable, with core measures holding just above 2%.

“As the outlook evolves, we stand ready to respond as needed,” the bank said, adding it would not allow temporary energy-driven price increases to become entrenched.

The labour market remains soft, with unemployment hovering between 6.5% and 7%, reflecting weak hiring and job losses in sectors affected by US tariffs. Housing activity has also slowed, weighed down by affordability challenges and slower population growth.

Globally, economic growth is to remain steady at around 3% through 2028, though inflation forecasts have been revised upward due to rising energy costs.

The bank emphasised it is closely monitoring both geopolitical developments and trade dynamics while maintaining its commitment to price stability as uncertainty continues to weigh on the global economy.