Central bankers dread the word ‘stagflation’, and today Governor Macklem was doing his best to avoid saying it out loud. The BoC held the policy rate at 2.25%, caught between a softening economy and an energy shock that threatens to push inflation higher.
The notables.
- Q4 GDP contracted 0.6%, weaker than forecast. Early 2026 data suggest modest growth, but below the January MPR’s expectations.
- The labour market is soft — late-2025 job gains were largely reversed, with unemployment at 6.7%.
- CPI eased to 1.8% in February, core measures close to 2%. Before the war, inflation was well-behaved.
- Higher oil from the Strait of Hormuz closure will push headline CPI up, but the Bank sees limited pass-through risk — for now.
- Unlike the post-COVID shock, which hit an overheated economy, this one is landing on slack. The CPI transmission dynamics could be very different.
- Governor Macklem flagged long-term inflation expectations as the watchpoint — a nod to the 1970s, when expectations unanchored and took a decade to correct.
The implications.
- The market is pricing a reasonable chance of a hike this year. We think underlying economic weakness makes that a stretch.
- If the conflict is short-lived, the dovish case strengthens — pre-war inflation was on target and the economy was already soft.
- The CUSMA negotiations remain a wild card with the outcome likely to significantly impact the Bank’s thinking
- Yields are higher on the day, likely due to higher oil prices
