Bank of Canada Rate Decision Looms as Iran War Fuels Inflation Surge

The Bank of Canada will deliver its next interest rate decision on Wednesday, April 29, and Governor Tiff Macklem is widely expected to keep the policy rate on hold at 2.25 per cent. The decision arrives in the most complex economic environment Canadian policymakers have faced since the early pandemic, with energy prices spiking on the war in Iran, headline inflation climbing back above target and US tariffs squeezing manufacturing employment.

The decision will be accompanied by a fresh Monetary Policy Report, the central bank's quarterly assessment of growth, inflation and risks to the outlook. The report is expected to recalibrate forecasts to account for the supply shock from the closure of the Strait of Hormuz, which has driven Brent crude prices above 100 US dollars per barrel for most of April.

Where the rate stands

The overnight rate has been at 2.25 per cent since the Bank's previous reduction earlier this spring, the bottom of a cutting cycle that began in April 2024 from a peak of 5 per cent. Bay Street analysts and financial markets now widely expect the Bank to remain on hold for the rest of 2026, with several major Canadian banks pushing back their forecasts for the next move into early 2027.

The shift in market expectations reflects a fundamental change in the economic backdrop. When the cutting cycle began two years ago, inflation was on a steady downward trajectory and the housing market was in a deep freeze. Today, the inflation picture has reversed, even as housing remains sluggish and the labour market continues to soften under the weight of tariff-driven manufacturing layoffs.

The inflation picture

Statistics Canada reported on April 20 that the Consumer Price Index rose 2.4 per cent year over year in March, up sharply from 1.8 per cent in February. The acceleration was driven almost entirely by energy, with gasoline prices surging 21.2 per cent on a monthly basis, the largest single-month increase ever recorded for that category.

The supply shock is directly linked to the conflict in the Middle East, where US and Israeli strikes against Iran have been followed by an effective shutdown of shipping through the Strait of Hormuz, a chokepoint that normally carries roughly one-fifth of global oil supply. Energy alone added approximately 0.7 percentage points to the annual inflation rate in March, according to the federal statistical agency's analysis.

Excluding energy, core measures of inflation have been more stable, suggesting that underlying price pressure remains relatively contained. That distinction is crucial for the Bank, which has historically argued that it should look through one-time supply shocks rather than respond with rate increases that would damage the broader economy.

The tariff complication

The Bank's task is complicated by the cumulative impact of US tariffs on Canadian exports. Steel and aluminum imports into the United States face a 50 per cent duty, automobiles face 25 per cent, and a wide range of forest products are also covered. While goods qualifying under the Canada-United States-Mexico Agreement remain exempt for now, the broader environment has chilled investment.

Prime Minister Mark Carney said earlier this month that businesses are holding back investment, "restrained by the pall of uncertainty that's hanging over all of us." Surveys by the Canadian Federation of Independent Business and the Bank of Canada itself have shown a sharp deterioration in business sentiment since the start of the year, particularly in Ontario and Quebec, where exposure to US trade is highest.

For the Bank of Canada, the tariff shock is both inflationary, by raising the cost of imported intermediate goods, and disinflationary, by weakening demand and the labour market. Macklem has spoken publicly about the difficulty of separating these forces, and has signalled that the central bank will rely heavily on incoming data rather than precommitting to a path.

The housing market

The housing market continues to drag on the broader economy. The Canadian Real Estate Association downgraded its forecast for 2026 in early April, citing higher fixed mortgage rates, weaker than expected sales in the first quarter and the effects of the so-called oil shock on household confidence. The MLS Home Price Index has now declined for 16 consecutive months.

A large share of outstanding Canadian mortgages are scheduled to renew in 2026, and many households will see significant increases in monthly payments even with the policy rate at its current level. That payment shock has been one of the most important arguments for keeping rates low, but it sits awkwardly against the inflation data.

Carney's federal government has tried to insulate buyers and renters with new measures to speed up homebuilding, including a partnership with Ontario announced in late March and a separate Ottawa-focused announcement on April 23. Whether those measures can offset the demand-suppressing effect of higher renewal rates remains an open question.

Reading Macklem's signals

The Governor and Senior Deputy Governor Carolyn Rogers will hold their post-decision news conference at approximately 10:30 a.m. ET on April 29. Markets will be parsing the language of the rate statement and the Monetary Policy Report for any signal about how the Bank weighs the energy-driven inflation surge against the underlying weakness in the economy.

The mortgage industry is paying particular attention to forward guidance. Penelope Graham, an analyst at Ratehub.ca, said this week that the Bank has remained "firmly on the sidelines" and that her team expects no further moves through the rest of the year. Other analysts have flagged the possibility, however small, of a cut later in 2026 if tariff-driven layoffs accelerate.

Provincial economies under stress

The rate decision will land in different ways across the country. Ontario and Quebec are bearing the brunt of tariff-related manufacturing strain, with auto-parts suppliers in southern Ontario warning of layoffs and Quebec aluminum producers under pressure. Alberta and Saskatchewan are benefiting in the short term from higher energy prices, even as Premier Danielle Smith continues to negotiate with Ottawa over a new pipeline and the structure of industrial carbon pricing.

British Columbia is wrestling with its own challenges, including the gas royalty overhaul announced this week that has unsettled the liquefied natural gas industry. Atlantic Canada continues to see softer growth, and the territories are dealing with cost-of-living pressures that are particularly acute in remote communities.

For households across the country, the most immediate consequence of the Bank's decision will be its effect on variable-rate mortgages, lines of credit and savings yields. With the prime rate at major Canadian banks tied to the policy rate, a hold means continued relief compared to the peaks of 2023 but no further easing for borrowers waiting to refinance.

What's next

The April 29 decision is the third of eight scheduled rate announcements in 2026. The next is set for June 4, with another Monetary Policy Report due in July. The Bank's deliberations between now and then will be shaped by the trajectory of the war in Iran, the outcome of any tariff negotiations between Ottawa and Washington and the direction of housing and labour data.

Macklem has emphasised that the Bank's mandate is price stability, not the management of any single sector or policy challenge. But with energy, tariffs, housing and the global conflict cycle all pulling in different directions, the central bank's path will be one of the most-watched economic questions in the country through the rest of the spring and summer.