Bank of Canada Holds Key Interest Rate at 2.25%

While many were watching for a potential move, the Bank’s decision to hold reflects a “wait-and-see” approach amidst a complex global landscape. Here are the three key takeaways from today’s announcement:

Steady Inflation: Annual inflation for February landed at 1.8%, which is slightly lower than anticipated and sits comfortably within the Bank’s target range.

Economic Headwinds: The Bank highlighted ongoing global uncertainties—specifically regarding Middle East tensions and upcoming trade deal reviews—as reasons for caution.

Cooling Labor Market: Recent data showed a rise in the unemployment rate to 6.7%, suggesting that the previous rate hikes are continuing to moderate the economy.

Prior to the war, the global economy was on pace to grow at around 3%, as expected in the January Monetary Policy Report (MPR). Economic growth in the United States has moderated but remains solid, driven by consumption and strong AI-related investment. US inflation remains above target and has evolved largely as expected. In the euro area, domestic demand is supporting growth while exports have contracted. China’s economy continues to be boosted by strength in exports, but domestic demand remains weak.

Since the outbreak of the conflict in the Middle East, global oil and natural gas prices have risen sharply, and this will boost global inflation in the near-term. In addition to energy supply disruptions, transportation bottlenecks stemming from the effective closure of the Strait of Hormuz could impact the supply of other commodities, such as fertilizer. Financial conditions have tightened from accommodative levels.

Global bond yields have risen, equity market prices have declined, and credit spreads have widened. The Canada-US dollar exchange rate has remained relatively stable.

After expanding by 2.4% in the third quarter of last year, GDP in Canada contracted 0.6% in the fourth quarter. This was weaker than expected at the time of the January MPR, but mainly because of a larger-than-expected drawdown in inventories. Domestic demand grew by more than 2% due to strength in consumer and government spending, even as housing markets remained weak.

We continue to expect the Canadian economy to grow modestly as it adjusts to US tariffs and trade policy uncertainty, but recent data suggest that near-term economic growth will be weaker than anticipated in January. The labour market remains soft. Employment gains in the fourth quarter of 2025 were largely reversed in the first two months of 2026, and the unemployment rate rose to 6.7% in February.