The Bank of Canada held its benchmark interest rate at 2.25 percent on Wednesday, marking its third consecutive hold, 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.

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 his opening statement, Macklem said Governing Council would look through the war's immediate impact on inflation, "but if energy prices stay high, we will not let their effects broaden and become persistent inflation."

TD Economist Maria Solovieva noted that markets are now pricing in the possibility of a rate hike by year-end. "When inflation is close to the central bank's target, there is no strong reason to change course," Solovieva said. "The central bank is going to stay patient, but vigilant," she added.

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 Bank said the Canada-US dollar exchange rate had remained relatively stable. For Canadian households, the rate hold means no immediate change for variable-rate mortgages, which track the Bank's policy rate.

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.

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.