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Essentials of Monetary Policy

The Bank Keeps Rates Unchanged as It Balances Two-Sided Risks to Inflation

March 18, 2026
Randall Bartlett, Deputy Chief Economist • LJ Valencia, Economist

According to the Bank of Canada (BoC)

  • As expected, the Bank of Canada left its policy rate unchanged in January at 2.25%. The overnight rate remains at the lower bound of the Bank’s estimated range for the neutral rate.  
  • The communications that accompanied the interest rate announcement told a tale of two time periods: before the conflict in the Middle East and after.
  • Prior to the conflict, recent data pointed to weaker economic activity and slower price growth. At -0.6% q/q annualized, real GDP growth in Q4 2025 was below the flat print the Bank projected in its January 2026 Monetary Policy Report (MPR) External link.. Data received for early 2026 suggest the economy is expanding again, but at a slower pace than the Bank had forecast in January (graph 1). The labour market also remains soft. Total CPI inflation in the final quarter of 2025 came in below the Bank’s expectations as well. And price growth eased further to 1.8% in February, down from 2.3% in January.  
  • Then came the conflict in the Middle East. According to Bank of Canada Governor Tiff Macklem, “It is too early to assess the impact of the war on growth in Canada.” If sustained, higher oil prices will boost income from exports. But they will also squeeze consumers. Financial conditions are already tightening as well, pushing global bond yields higher, stock markets lower, and credit spreads wider. Our recent research External link. has concluded that higher oil prices due to the conflict with Iran should boost growth and inflation this year (graph 2).
  • As per Governor Macklem: “Canada’s economy is dealing with a lot, and now we face more volatility… Trade and geopolitical uncertainties remain, and the conflict in the Middle East has broadened the range of possible outcomes… Relative to our January forecast, risks to economic growth are tilted to the downside. Near-term growth looks weaker than expected and the review of the Canada-United States-Mexico Agreement is a big unknown. At the same time, risks to inflation are tilted to the upside, because of the sharp increase in energy prices.”

Implications

Governor Macklem put the Bank of Canada’s dilemma best: “Economic weakness combined with rising inflation is a dilemma for central banks.” For now, with inflation close to target and the economy in excess supply, the Bank believes that the risk of higher energy prices quickly spreading to other goods and services prices is low. However, the longer and more widespread the conflict, the greater the risk that the price impact could become broader and more persistent.

 

Given all this uncertainty, it came as no surprise that the Bank kept rates on hold at its March meeting. And while Governor Macklem was clear that the Bank stands ready to respond as needed as the outlook evolves, the tone of the communications tilted slightly dovish. As a result, we continue to expect officials will leave the policy rate unchanged for the duration of this year.

2026 Schedule of Central Bank Meetings

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.