Bank of Canada Holds Steady, Clearly "Sees Through" Short-Term Oil Price Shocks, Focuses on Growth Downside Risks

On March 18, the Bank of Canada announced it would keep interest rates unchanged, clearly indicating it will “look through” the short-term inflation impact of the Middle East conflict while anchoring its policy focus on downside risks to economic growth.

Led by Governor Tiff Macklem, the decision-making committee maintained the policy rate at 2.25%, in line with market expectations and most economists surveyed by Bloomberg. The bank stated in its announcement that the economic impact of the Middle East conflict is “highly uncertain,” and its duration and scale cannot be predicted. Meanwhile, the bank removed the phrase “current policy rate remains appropriate” from its January statement, instead saying it is “ready to respond as needed,” signaling a more flexible stance.

Macklem said that ongoing trade tensions have led to excess supply in the economy, which is expected to suppress inflationary pressures in Canada. Currently, inflation is close to the bank’s 2% target. Following the rate decision, the Canadian dollar continued to decline, falling 0.2% against the US dollar intraday.

Downside growth risks, labor market under pressure

Although rising oil prices will temporarily boost inflation, the bank explicitly pointed out that “growth risks are tilted to the downside,” supported by a series of weaker-than-expected economic data.

In the labor market, Canada’s employment plunged by 83,900 in February, the largest monthly decline in four years, with the unemployment rate rising to 6.7%. At the same time, the economy faces multiple headwinds such as slowing population growth and trade disruptions, leading to a 0.6% annualized contraction in GDP in the fourth quarter.

Macklem noted that while rising oil prices will “boost energy export revenues,” higher gasoline prices also “reduce consumers’ disposable income, limiting spending in other areas,” thus offering limited actual stimulus.

The double-edged sword of oil price shocks

As the largest foreign supplier of crude oil to the United States, Canada’s sensitivity to oil price fluctuations differs from other economies. If oil prices continue to rise sustainably, it could bring significant revenue to energy-rich provinces’ governments and companies; however, the chain reaction cannot be ignored.

Macklem warned that the Middle East conflict has already led to tighter global financial conditions—rising bond yields, falling stock markets, and widening credit spreads. He also specifically mentioned that transportation bottlenecks in the Strait of Hormuz “could affect the supply of other commodities such as fertilizers,” with potential spillover effects worth monitoring.

Market and economists: clear dovish tone

Several market analysts believe that the dovish tone of this statement is more pronounced than market pricing had anticipated.

Benjamin Reitzes, a rate and macro strategist at BMO Capital Markets, said in an email: “The policy statement’s tone is dovish, especially relative to market expectations. Until more is known about the duration and scale of energy price shocks, policy will remain unchanged. Without this conflict, the bank would likely be more concerned about the outlook and adopt a more dovish stance.”

Jason Daw, North American interest rate strategist at RBC Capital Markets, told BNN Bloomberg: “The outlook was already uncertain weeks ago, and the emergence of oil price issues makes it even more opaque. All this indicates that the bank will keep policy steady for a longer period while digesting the related information.”

Avery Shenfeld, chief economist at CIBC, wrote in a report to investors that the bank “showed no signs of discussing rate cuts or hikes at this meeting,” consistent with its stance—that the impact of energy price shocks largely depends on their duration, which is “currently unpredictable.”

Holding steady may not last long

Although the decision was in line with expectations, some economists warn that the window for keeping rates unchanged may not be long-lasting.

Andrew DiCapua, chief economist at the Canadian Chamber of Commerce, said in an email: “The Bank of Canada may be holding steady for now, but this stance might not last much longer. Despite rising oil prices putting real cost pressures on Canadians, inflation risks remain low. The governor acknowledged the asymmetric trade-offs posed by high oil prices to the Canadian economy.”

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