Banque du Canada Holds Rates at 2.25%

The Bank of Canada on Wednesday kept its benchmark interest rate unchanged at 2.25%, opting for caution as global financial markets face heightened volatility driven by geopolitical tensions and rising energy prices.

The decision was widely anticipated by markets, with policymakers choosing to look past the recent surge in oil prices linked to the ongoing conflict involving Iran, while assessing broader inflation dynamics.

Governor Tiff Macklem said that, so far, higher oil prices have not significantly filtered into the cost of other goods, and long-term inflation expectations remain stable. However, he acknowledged that uncertainty remains elevated due to geopolitical risks and ongoing U.S. tariff policies.

He warned that if elevated oil prices persist and begin to feed into broader inflation, the central bank may be forced to resume rate hikes in a more sustained manner.

The conflict involving Iran has triggered a sharp rise in global energy prices and disrupted transportation networks, weighing on growth prospects in oil-importing economies while pushing inflation higher worldwide.

Despite these pressures, the global economic outlook remains relatively resilient. Growth in the United States is expected to remain strong, supported by investment in artificial intelligence and robust consumer spending. Meanwhile, China continues to benefit from solid export performance.

In contrast, the Eurozone is likely to face headwinds, as higher oil and natural gas prices weigh on economic activity.

Financial conditions have experienced significant swings in recent months, reflecting daily developments in the Middle East and shifting expectations around inflation and interest rates.

Bond yields have edged higher since January, while equity markets, after an initial sharp sell-off at the onset of the conflict, have shown signs of recovery. The U.S. dollar has strengthened against most major currencies, while the Canadian dollar has remained relatively stable against its U.S. counterpart.

The central bank expects the global economy to grow by around 3 percent annually through 2026–2028. However, inflation forecasts for the coming year have been revised upward, largely due to rising energy costs.