Bank of Canada Maintains Steady Rates While Monitoring Middle East Energy Risks

Governor Tiff Macklem warns the Bank of Canada is prepared to hike rates if high oil prices from the Middle East conflict lead to persistent domestic inflation.

By: AXL Media

Published: Mar 19, 2026, 4:19 AM EDT

Source: Reuters

The Policy Hold and Inflationary Outlook Governor Tiff Macklem confirmed that the Governing Council’s decision to maintain the benchmark rate at 2.25% stems from a need to assess the long-term impact of the ongoing conflict in the Middle East. While current inflation had been stabilizing near the 2% target prior to the war, the bank anticipates a short-term spike in gasoline and transport costs. Macklem emphasized that the central bank’s priority is preventing these temporary energy shocks from embedding themselves into the core economy. The next policy decision is scheduled for April 29, 2026, with most market participants expecting the hold to continue as officials gather more data on global oil supply chains.

Energy Market Volatility and the Strait of Hormuz The strategic backdrop of the bank's decision is heavily influenced by the security of global oil transit. Economists have warned that if the Strait of Hormuz—a corridor responsible for 20% of global oil trade—remains restricted for more than a few weeks, current growth and inflation forecasts for Canada will be upended. While Macklem noted that the spillover into broader consumer prices currently appears contained, a prolonged disruption would force the bank to shift from its neutral stance. This creates a delicate balancing act for the BoC, as Canada is both a major oil producer and a consumer market sensitive to fluctuating fuel prices.

Market Reaction and Interest Rate Bets Following the announcement, the Canadian dollar saw a slight dip, trading at approximately 73.01 U.S. cents. Financial markets reacted by recalibrating expectations for the second half of the year; money markets have significantly increased bets for a potential rate hike starting in June 2026. Prior to the escalation in the Middle East, a rate cut was considered a possibility to stimulate a softening economy, but the "war premium" on energy has shifted the consensus toward a potential 25-basis-point increase by December to curb inflationary pressure.

Domestic Economic Headwinds and Trade Uncertainty The Bank of Canada's dilemma is intensified by a sluggish domestic environment. Beyond energy concerns, the Canadian economy is grappling with a soft labor market, declining business investment, and the looming shadow of U.S. trade policy. The ongoing uncertainty surrounding the U.S.-Mexico-Canada Agreement (USMCA) and potential...