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Rates Unchanged As Bank Sees Inflation Spike As Temporary

Canadian Economics

By: Walter Bolduc

    

The Bank of Canada held the overnight rate at 2.25 per cent, the Bank Rate at 2.50 per cent, and the deposit rate at 2.20 per cent, the fourth consecutive hold since the easing cycle ended in October 2025.

  • The Bank’s April projection assumes tariffs stay in place and the global oil benchmark settles at US$75 per barrel by mid-2027.
  • Global GDP growth is forecast at roughly 3 per cent through 2028. The United States is supported by AI investment and consumer demand, China by exports, and the euro area is held back by higher energy costs.
  • Canadian growth resumed early this year after a contraction in the fourth quarter of 2025. Consumer and government spending are supporting activity. However, tariffs and trade uncertainty are weighing on exports and business investment. Housing activity continues to be held back by slow population growth, economic uncertainty, and ongoing affordability concerns.
  • The unemployment rate is holding in the 6.5 to 7 per cent range. The softness reflects both reduced hiring and fewer active job seekers. Job losses remain concentrated in tariff-affected sectors.
  • The Bank projects Canada’s economy to expand by 1.2 per cent in 2026, 1.6 per cent in 2027, and 1.7 per cent in 2028, gradually absorbing excess supply.
  • Higher oil prices are shifting the composition of Canadian growth rather than its level. As a net oil exporter, Canada gains national income from elevated prices even as households pay more at the pump.
  • CPI inflation reached 2.4 per cent in March on higher gasoline prices and is expected to accelerate to 3 per cent in April. Core measures have held just above 2 per cent, and the share of CPI components running above 3 per cent has been declining.
  • The Bank’s assumes the war’s impact on inflation will be temporary. Its baseline projection assumes oil prices are expected to ease, and inflation will come down to its 2 per cent target early next year.
  • However, Governing Council will not let energy-driven price pressures harden into broader, sustained inflation and is prepared to adjust monetary policy as conditions evolve.
  • The next interest rate decision is June 10, 2026. The next Monetary Policy Report is July 15, 2026.

Key Insights

Higher oil prices change the composition of Canadian growth, not its level. Canada is a major net exporter of oil, so an oil price shock works through the economy in two directions. Higher prices strain household finances and ultimately hurt real consumer spending, though they lift revenues for energy producers and the governments, particularly those of major energy producing provinces. The net impact on Canada’s economy is expected to be modest, and the Bank’s 2026 GDP forecast remains largely intact from its January projections.

The decision to treat the energy-driven inflation spike as temporary rests on three conditions. The Bank stated it will look past the war’s immediate impact on inflation but will not let elevated energy prices harden into a broader inflation problem. That stance is conditional on three things being held: core inflation measures staying near 2 per cent, fewer CPI components running above 3 per cent, and longer-term inflation expectations remaining anchored. We expect each to hold in the near term; core measures have been drifting lower, and fewer CPI components are running above 3 per cent.

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