Canada holds key interest rate at 2.25% as the Middle East conflict clouds the economic outlook

In its policy statement, the central bank warned that the ongoing conflict in the Middle East has “increased volatility in global energy prices and financial markets", adding that the scale and duration of the crisis remain highly uncertain.

Before the outbreak of the conflict, the global economy had been on track to grow at around 3%, broadly in line with earlier projections.

However, surging oil and natural gas prices since the escalation have raised near-term inflation risks worldwide while also tightening financial conditions.

The Bank noted that global bond yields have risen, equity markets have declined and credit spreads have widened, reflecting increased investor caution.

Domestically, Canada’s economic momentum has weakened. After expanding 2.4% in the third quarter of 2025, the economy contracted 0.6% in the fourth quarter, largely due to a sharp drawdown in inventories.

While consumer and government spending remained resilient, housing activity continued to lag.

Recent labour market data also point to softness. Employment gains recorded late last year have been reversed in early 2026, pushing the unemployment rate up to 6.7% in February.

At the same time, inflation has moderated. Consumer price inflation eased to 1.8% in February from 2.3% in January, with core inflation measures also hovering close to the bank's 2% target.

However, officials cautioned that rising gasoline prices, driven by higher global energy costs, are likely to push headline inflation higher in the coming months.

The central bank said risks to economic growth are now “tilted to the downside", even as inflation risks have increased due to energy price pressures.

The Bank also highlighted ongoing uncertainty stemming from U.S. trade policies and tariffs, noting that it continues to assess how these factors are affecting Canada’s export performance and broader economic adjustment.

Policymakers said they are closely monitoring developments in the Middle East and stand ready to act if conditions change.

“As the outlook evolves, we stand ready to respond as needed,” the Bank said, reaffirming its commitment to maintaining price stability amid global economic turbulence.