Bank of Canada Holds Rate at 2.25 Per Cent as Iran War Pushes Inflation Higher

The Bank of Canada held its target for the overnight rate at 2.25 per cent on April 29, marking a fourth consecutive hold and confirming that the central bank now sees little room to ease policy as the war in Iran drives global energy prices higher. The decision, the third scheduled rate announcement of 2026, ended a brief period of speculation among Bay Street economists that softening domestic demand might justify a cut.

The bank's accompanying statement and Monetary Policy Report painted a cautious picture. Consumer price index inflation climbed to 2.4 per cent in March, up from prior months that had been trending toward target, and is expected to rise to roughly 3 per cent in April as gasoline and diesel pass through to the headline number. Officials projected that inflation would only return to the 2 per cent target in early 2027, and only on the assumption that oil prices ease later in the year.

What the bank decided

The hold leaves the policy rate unchanged since the last cut in October 2025. Governor Tiff Macklem and the governing council framed the decision as a balance between an economy that remains soft, with housing activity having declined in the fourth quarter of 2025 and population growth slowing, and an inflation outlook that has shifted upward because of factors largely outside Canadian control.

The bank's statement noted that rising global energy prices tied to the conflict in Iran are adding upward pressure on inflation. The Strait of Hormuz, through which roughly 20 per cent of seaborne oil moves, has been largely closed to commercial traffic since late February. Oil prices have swung between roughly $95 and $126 a barrel through April, and the resulting fuel cost spike is filtering through Canadian retail prices at the pump and through transportation-heavy supply chains.

The context for the decision

The Bank of Canada has been navigating an unusually crowded set of cross-currents. Domestically, the labour market has cooled, wage growth has moderated, and the housing market remains constrained by affordability and uncertainty. The aggregate price of a Canadian home declined 2.0 per cent year over year to $812,900 in the first quarter of 2026, although prices were essentially flat quarter over quarter.

Externally, the United States trade war has continued to pressure exporters, and the war in Iran has rewritten the inflation outlook by sending oil and refined product prices higher than the bank's January forecast assumed. The federal government's Spring Economic Update on April 28 introduced a temporary suspension of the federal fuel excise tax, which will reduce gasoline prices by up to 10 cents per litre and diesel prices by up to four cents through September 7, 2026. The bank acknowledged that measure but warned that the underlying global energy shock will continue to feed through to other prices.

Reaction from markets and the housing industry

Bank of Montreal, Toronto-Dominion Bank, and Royal Bank of Canada economists had broadly expected the hold, and bond markets moved only modestly on the announcement. Two-year Government of Canada yields edged higher in the wake of the statement, reflecting an interpretation that the next move could be up rather than down.

Phil Soper, president and CEO of Royal LePage, said in a statement that the central bank now has no room to lower rates further and that the next move could in fact be upward. Mortgage brokers across the country have begun warning prospective buyers and renewing borrowers that the era of falling rates may be over for the foreseeable future, and that they should plan accordingly when stress-testing their household budgets.

What it means for Canadians

For households, the immediate consequence is straightforward. Variable-rate mortgages and home equity lines of credit will continue to track the policy rate, which means no relief on monthly payments through at least early summer. Borrowers approaching renewal on five-year fixed rate mortgages, many of which were issued in the unusually low-rate window of 2020 and 2021, will continue to face a significant payment shock when they refinance.

For consumers more broadly, the bigger story is at the gas pump and the grocery store. The bank's projection that inflation could touch 3 per cent in April reflects largely the passthrough of higher fuel prices, but second-round effects on food, transportation, and household goods are already visible in retail data. Statistics Canada figures released this week showed the average Canadian gasoline price at $1.83 per litre on Thursday afternoon, up sharply from a year earlier, with British Columbia drivers paying just over $2 a litre on average.

Economic implications

The hold reinforces the federal government's argument that fiscal policy needs to do more of the work in supporting the economy through the current shock. The Spring Economic Update introduced not only the fuel excise tax suspension but also an enhanced Canada Groceries and Essentials Benefit, increased by 25 per cent for five years starting July 2026, and a planned reduction in the base Canada Pension Plan contribution rate from 9.9 per cent to 9.5 per cent effective January 1, 2027.

For businesses, the rate environment continues to constrain capital spending, particularly in housing construction, where developers have struggled to make projects pencil at current borrowing costs. The federal Canada Strong Fund, announced two days before the rate decision, is intended in part to crowd in private capital for major projects that have stalled in the current environment, although the first investments will not be made until the second half of the year.

Provincial and sectoral responses

Provincial finance ministers have offered measured reactions. Ontario, which announced an HST removal on new homes valued up to $1 million from April 1 through March 31, 2027, has framed the federal-provincial pairing as crucial to keeping housing starts above the level needed to clear the supply backlog. The Ford government estimates the HST move could generate an additional 8,000 housing starts and support up to 21,000 jobs.

In Alberta, where energy royalties shield the provincial budget from much of the rate-induced softness elsewhere, officials have used the decision as another argument for accelerating major project approvals. Alberta introduced legislation earlier this month establishing 120-day approval timelines for major energy projects, a move provincial ministers have linked to the broader federal-provincial push to attract investment.

The currency dimension

The Canadian dollar has held in a relatively narrow range against the United States dollar through April, despite the rate hold and the unsettled global picture. Traders have interpreted the bank's signal that the next move could be a hike rather than a cut as a stabilising factor for the loonie, particularly relative to the policy paths being signalled by the Federal Reserve and the European Central Bank. A weaker Canadian dollar would, on its own, add to inflation by making imports more expensive.

For Canadian businesses with significant cross-border exposure, the currency dynamics interact with the tariff environment in complex ways. Exporters to the United States benefit from a softer Canadian dollar but face headwinds from tariffs. Importers face the opposite combination. The Bank of Canada has indicated that it monitors currency developments but does not target a specific level for the exchange rate.

The labour market angle

The Canadian labour market has cooled through the early months of 2026, with employment gains moderating and the unemployment rate drifting higher. Wage growth has slowed in line with the broader cooling, although it remains above the rate consistent with the bank's 2 per cent inflation target. The labour market dynamics give the central bank some comfort that the energy-driven inflation surge will not feed durably into wage settlements, which is essential to the bank's projection that inflation returns to target in early 2027.

Statistics Canada's next Labour Force Survey, scheduled for May 9, will provide an updated reading on hiring conditions and on the unemployment rate. Bay Street economists will be watching for evidence of either a sharper deterioration in employment or a stabilisation that would suggest the cooling has run its course.

The rate decision in historical perspective

Tiff Macklem's tenure as Bank of Canada governor has spanned an unusually turbulent period in Canadian monetary policy. The rapid hikes through 2022 and early 2023 in response to post-pandemic inflation, the cuts that followed as inflation eased through 2024 and 2025, and the current period of holding amid renewed energy-driven inflation pressure all reflect the difficulty of managing monetary policy in a global environment shaped by repeated shocks.

The bank's communications have evolved over the period to emphasise the data-dependent nature of decisions and the importance of staying flexible in the face of uncertainty. Governor Macklem and senior deputy governor Carolyn Rogers have both used public appearances to underscore that the bank is not committed to any particular rate path and that future decisions will depend on incoming data.

The bank's quarterly Monetary Policy Report, released alongside the rate decision, included updated projections for growth, inflation, and the labour market through 2027. The report assumed that energy prices would moderate in the second half of 2026, that trade frictions would persist but not escalate further, and that the labour market would continue its gradual cooling without entering a more pronounced contraction. Each of those assumptions carries material risks in the current environment.

What's next

The Bank of Canada's next interest rate announcement is scheduled for June 10, 2026. Between now and then, the central bank will be watching three indicators in particular. First, whether oil prices continue to swing wildly with the Iran war. Second, whether second-round inflation effects start to show up in core measures stripped of food and energy. Third, whether labour market data and consumer spending continue to weaken, which would push back against the inflation case for any future hike.

Bank watchers say the realistic scenarios for the June meeting range from another hold, which remains the base case, to a small increase if energy prices fail to ease and core inflation drifts higher. A cut, once seen as plausible, has all but vanished from forward curves traded in Canadian money markets.