Recent data releases point to slowdown, but inflation shock looms
The Bank of Canada elected to hold its key interest rate steady at 2.25 per cent on Wednesday.
The decision comes after a disappointing labour market report for February, with the Canadian economy losing 84,000 jobs. Headline CPI for that month was below the BoC's two per cent target at 1.8 per cent.
"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," a press release announcing the decision reads. "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."
Markets had priced in this hold as a near-certainty. BoC Governor Tiff Macklem has maintained that the current rates are adequate to support the economy given US trade uncertainty. The new uncertainty introduced by the US-Israeli war with Iran and its resultant energy market shocks has not yet been reflected in CPI, jobs, or GDP data, and may play into the BoC's decision to hold.
"The war in the Middle East has increased volatility in global energy prices and financial markets, and heightened the risks to the global economy. The breadth and duration of the conflict, and hence its economic impacts, are highly uncertain," the press release reads. "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."
Markets have not yet reached consensus on the future direction for the Bank of Canada, with many pricing in rate hikes later in the year. In the wake of February's job losses, Russell Investments' Head of Canadian Strategy BeiChen Lin argued that we could see the BoC cut interest rates as early as its next meeting in April.
