The Bank of Canada held its key interest rate steady for the fourth straight time on Wednesday, but warned inflation is expected to heat up in the near term as higher energy prices ripple through the economy.
In a widely expected decision by analysts and economists, the central bank kept its target for the overnight rate at 2.25%. However, the Bank warned that global uncertainty remains high because of the Iran war, rising energy prices, transportation disruptions and shifting U.S. trade policy.
In its accompanying statement, the Bank said it now expects inflation to rise to about 3% in April, up from 2.4% in March, mainly because of sharply higher gasoline prices. However, it said inflation should return to its 2% target early next year if oil prices ease as expected.
The Bank’s outlook assumes global oil prices will fall to about US$75/barrel by mid-2027 and that U.S. tariffs remain roughly unchanged. Those assumptions are important because higher oil prices and tariffs are affecting both inflation and economic growth. U.S. crude oil futures were trading around $107/barrel this afternoon.
In Canada, the economy is expected to grow slowly but steadily. After shrinking in the fourth quarter of 2025, growth is forecast to have resumed in early 2026. The Bank projects GDP growth of 1.2% this year, rising to 1.6% in 2027 and 1.7% in 2028.
Consumer and government spending are helping support the economy, the Bank said, but exports and business investment are being held back by tariffs and trade uncertainty. Housing activity has also weakened because of affordability challenges, slower population growth, and economic uncertainty.
The labour market remains soft, with weak hiring and job losses in sectors affected by U.S. tariffs. The unemployment rate is still in the 6.5% to 7% range.
The Bank said Canada’s position as a major oil exporter helps offset some of the economic damage from higher oil prices, since higher crude values boost national income. However, consumers are still being squeezed by higher gasoline costs.
“(The Bank) is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation,” it said. “As the outlook evolves, we stand ready to respond as needed.”
