The Bank of Canada held its benchmark interest rate at 2.25 percent on Wednesday, marking the second consecutive pause in its easing cycle, as Governor Tiff Macklem warned that surging oil prices driven by the war in the Middle East could force the central bank to reverse course and raise borrowing costs if inflation pressures prove persistent.

SECOND HOLD OF 2026

The decision to maintain the overnight rate at 2.25 percent, with the Bank Rate at 2.5 percent and the deposit rate at 2.20 percent, had been widely anticipated by markets. The Bank of Canada last adjusted its rate in October 2025, capping a nine-cut easing cycle that began in June 2024 and brought the benchmark down from its post-pandemic peak.

But the tone of the accompanying statement was markedly more cautious than in January. The governing council explicitly cited the Middle East conflict as a source of heightened volatility in global energy prices and financial markets, warning that the "breadth and duration of the conflict, and hence its economic impacts, are highly uncertain."

RATE HIKE BACK ON THE TABLE

In remarks following the announcement, Macklem went further than the written statement, saying the Bank of Canada would not hesitate to raise rates if the oil price shock feeds through into broader inflation expectations. It was a striking departure from the dovish posture that had characterized Ottawa's monetary policy for much of the past year and reflected the growing tension between a softening domestic economy and imported energy inflation.

TD Economist Maria Solovieva noted that markets are now pricing in the possibility of a rate hike by year-end, a dramatic shift from the start of 2026 when investors had expected further cuts. "When inflation is close to the central bank's target, there is no strong reason to change course," Solovieva said. "But the war has introduced a new variable that could upend all of those calculations."

TARIFFS ADD TO UNCERTAINTY

The Bank of Canada also flagged ongoing trade tensions with the United States as an additional source of economic uncertainty. The governing council said it would continue to assess the impact of U.S. tariffs and trade policy unpredictability on the Canadian economy, alongside the evolving Middle East situation. Recent data pointed to weaker economic activity, with risks to growth "tilted to the downside," even as inflation risks have increased due to higher energy prices.

The Canadian dollar, which has been under pressure for much of the year, showed little immediate reaction to the hold decision, suggesting that markets had already priced in both the decision and the hawkish shift in tone. For Canadian households, the rate hold means no immediate relief on variable-rate mortgages, which currently sit at a low of 3.35 percent following the cumulative cuts of the past eighteen months.

GLOBAL CENTRAL BANK LOGJAM

The Bank of Canada's decision places it squarely in line with the Federal Reserve, which also held rates steady on Wednesday, and the Bank of Japan, which maintained its benchmark at 0.75 percent on Thursday. All three central banks cited the Iran conflict and energy price volatility as reasons for caution, underscoring the extent to which the war has paralyzed the global monetary policy cycle.

Ashish Dewan, investment strategist at Vanguard Canada, warned that if the conflict persists for more than two quarters, the Bank of Canada would "likely become more inclined to hike rates, as headline inflation could rise by roughly 75 basis points and core inflation by about 30 basis points." The next scheduled rate announcement is April 29, and the bank's monetary policy report will be released at the same time.