Why did the Bank of Canada decide to hold its policy rate at 2.25% in April, and what key uncertainties influenced that decision?

The Bank of Canada held its policy rate at 2.25% in April because policymakers judged that borrowing costs were 'appropriate' given their outlook for the economy and inflation. However, they emphasized 'unusually elevated' uncertainty stemming from two major external risks: the ongoing war in the Middle East and the US review of the North American trade agreement (CUSMA). These developments created a 'range of views' among officials on the most likely path for interest rates, with no consensus on whether future moves would be hikes or cuts — depending on how those risks evolve. Specifically, new US tariffs on Canadian goods could prompt rate cuts, while persistently high oil prices driven by the Middle East conflict — if embedded in inflation and inflation expectations — would necessitate rate hikes. As a result, the council stressed it 'may need to be nimble' and did not rule out adjustments, though it expected 'small' changes in its base-case outlook.

What are the two main geopolitical scenarios discussed by the Bank of Canada that could lead to opposite interest rate actions, and how would each affect monetary policy?

The Bank of Canada identified two distinct geopolitical scenarios that could trigger opposing monetary policy responses: first, the imposition of new US tariffs on Canadian goods, which officials said 'may prompt rate cuts'; and second, persistently elevated oil prices driven by the Middle East conflict, which — if they become entrenched in inflation and inflation expectations — 'would necessitate hikes'. In the oil-price scenario, the magnitude of tightening would depend on secondary effects, including how much capital expenditure flows back into Canada’s oil and gas sector and how the Canadian dollar (loonie) responds. The bank explicitly linked these variables to the degree of policy tightening required, underscoring that the path forward is conditional and highly sensitive to real-time developments in trade and energy markets.

Bank of Canada Sees No Clear Rate Path Amid Tariff and Oil Risks

May 13, 2026

The Bank of Canada held rates at 2.25% amid geopolitical oil risks and trade uncertainties. Officials indicated that sustained high oil prices could drive rate hikes, directly impacting capital expenditure in the energy sector.

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