Bank of Canada Rate Decision – On the Horns of Dilemma

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