Bank of Canada governor takes questions after interest rate announcement

We're very pleased to be here to discuss today's monetary policy decision. Today the Governing Council maintained the policy rate at 2 and a quarter percent, and we've held the policy rate at this level since October.

The Canadian economy continues to face heightened uncertainty related to US trade policy and geopolitical risks. Now, the war in Iran has added a new layer of uncertainty. Its impact on the global and Canadian economies will depend on how long the conflict lasts and the extent to which it spreads across the Middle East.

Inflation in Canada has been close to the 2% target for more than a year now. But as we've seen, the war in Iran is causing oil prices to move sharply higher and this will push inflation up in the near term.

Canada's economy is dealing with a lot and we now face more volatility. The Bank of Canada's role is to be a source of stability. We're supporting economic activity while ensuring that a jump in energy prices doesn't turn into persistent inflation.

So, let me expand on what we've seen in the economy since we published our January Monetary Policy Report and what we see ahead.

Recent data show the Canadian economy remains in excess supply and is growing slowly as it adjusts to US tariffs and uncertainty. After growing 2.4% in the third quarter of last year, GDP shrank by 0.6% in the fourth quarter. This was weaker than we forecast at the time of the January MPR, but that's mainly because inventories were drawn down more than we expected. Domestic demand actually grew by 2.4% because of the strength in consumer and government spending, although housing was weak.

Data received for early 2026 suggests the economy is expanding again, but at a slower pace than we had forecast in January. The labor market remains soft. The job gains we saw late last year were largely reversed in the first two months of 2026 and the unemployment rate rose to 6.7% in February. Recent trade data have been volatile, but they suggest growing weakness in exports.

Inflation eased further to 1.8% in February, down from 2.3% in January. CPI inflation, excluding taxes and measures of core inflation, have also come down and are all now close to 2%. Food inflation, however, remains a problem. Food inflation slowed in February, but is still elevated. The recent sharp increase in global energy prices is causing higher prices at the pump as we've all seen and this will push inflation up in coming months.

It's still too early to assess the impact of the war on growth in Canada. If higher oil prices are maintained, this will boost incomes from our energy exports. At the same time, higher oil prices squeeze consumers, leaving them with less income for everything else.

Beyond the jump in energy prices, the war in Iran will affect households and businesses in other ways. Financial conditions have already tightened. Global bond yields are higher, stock markets are lower, and credit spreads are wider. Transportation bottlenecks caused by the effective closure of the Strait of Hormuz could also impact the supplies of other commodities like fertilizer.

In its monetary policy deliberations, Governing Council is considering both the most likely path for the economy and inflation and the risks to the outlook. Uncertainty is acute. Trade and geopolitical uncertainties remain and the conflict in the Middle East has broadened the range of possible outcomes.

Relative to our January forecasts, risks to economic growth are tilted to the downside. Near-term growth looks weaker than expected and the review of the Canada, United States, Mexico agreement is still a big unknown. At the same time, risks to inflation are tilted to the upside because of the sharp increase in energy prices.

Economic weakness combined with rising inflation is a dilemma for central banks. Increasing interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target.

Canada's outlook is further complicated by structural change, shifting trade relationships, the adoption of AI, and changes in demographics. With inflation close to target and the economy in excess supply, the risk that higher energy prices quickly spread to the prices of other goods and services looks contained. But the longer the conflict lasts and the wider it gets, the bigger the risks. Governing Council will look through the war's immediate impact on inflation. But if energy prices stay high, we will not let their effects broaden and become persistent inflation.

At our meeting this week, we decided to maintain the policy rate at 2 and a quarter percent. As the outlook evolves, we stand ready to respond as needed. We are continuing to assess the impact of US tariffs and trade policy uncertainty and how the Canadian economy is adjusting and we are closely monitoring the unfolding conflict in the Middle East. The bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of upheaval. And with that, the Senior Deputy Governor and I will be very pleased to take your questions.

Okay. Thank you, Governor. We will go to questions now. We'll start with the reporters who are here in Ottawa at the bank and then we'll go to those who have joined remotely. As usual, I'm asking everyone to limit yourself to one question, please. That way we will have a chance to get to every media outlet. If I forget to do so, please state your name and affiliation. For those in the room, please activate the microphone by pressing the button in front of you so that everyone can hear your question and press it again to turn it off once you're done.

So, we will start with our first question. I'm going to take questions on this side of the room as I'm looking at it. And I'll start with Mark Rendell of the Globe and Mail, please.

Hi, Governor. Rendell with the Globe and Mail. You spoke about how it's too early to tell whether the Middle East is going to be like what the impact on the Canadian economy is going to be. I'm wondering in general, is an oil price increase like this net positive or net negative for the Canadian economy? And if this kind of a question of duration, like it's a short-term shock to consumers, but a longer term potential benefit to oil producers and oil producing regions, like how long does that duration need to happen before it shifts from net negative to net positive?

So yes, there are multiple effects of higher oil prices on the Canadian economy and as you suggest it depends very importantly on the duration. So I mean I checked the screen before I came down. WTI was you know $98, $99. So I mean if oil prices stay high for an extended period that does mean that the income coming into the country from our exports of oil, we are a net exporter of oil and natural gas, those incomes will be higher that will tend to support the economy. The other side of course is that for consumers, for most businesses, most other businesses, higher oil prices are going to squeeze them. They're going to, you know, for households, if you're spending more to fill up your car, you got less money to spend on everything else. That will tend to hurt consumption. And for businesses, you know, their profit margins can get squeezed as they have higher energy costs.

There are also some other effects though. You know, as I mentioned, since the start of the war, you've seen some tightening in financial conditions. Stock markets down, bond yields are up, credit spreads have tightened. So, you know, that's also impacting Canadians. And then, you know, I think what, you know, the longer this conflict goes on, there is more potential for wider implications. Oil and natural gas are not the only commodities that go through the Strait of Hormuz. Other petrochemical commodities, fertilizers in particular, go through. If they're blocked, that will have other global impacts. So all to say, I think the short answer, look, is it's too early to assess the effect on growth. It's going to depend importantly on duration and it's going to depend on sort of how this conflict materializes. I think what we can say is that certainly if it lasts, whether it's net positive or net negative, I think you will see some shifts in the composition of growth. Obviously, the energy sector will do better. Consumers will be more squeezed.

Okay, we'll go to Craig Lord from the Canadian Press, please.

Hi, Governors. Thanks for taking our questions. How is the Bank of Canada thinking about food inflation right now? Are impacts there in your view mostly transitory compared to exchange rates and the upcoming energy price influence or is it becoming a more persistent problem in the wider inflation basket?

Yeah, we have been looking at this closely. I'll ask Carolyn to say a few words on this.

All right, we'll go to Greg Quinn from Market News, please.

Good morning. The statements use the word dilemma to describe the risks of economic growth and faster inflation. That sort of implies a balanced approach, but you also have new language about higher energy prices and lack of tolerance for that becoming sticky inflation. So, is this really a situation where your view of policy moves is equally balanced or do you have the thumb on the scale towards a potential increase?

Look, I think, you know, the short answer, Greg, is uncertainty's high. We, you know, since we published our forecast in January, we've seen some evolution of the risks as I outlined. We're, you know, we're going to be seeing how those evolve, how those materialize, and we're prepared to respond as needed. I, you know, I think, you know, there are really two main things we're watching. Obviously, the war in Iran, you know, we're in week three. This is an economic shock. How big it is is going to depend a lot on how long it lasts, whether it widens, how disruptive it is. You know, here in Canada, we are starting from a position where inflation is 2%. It's actually been close to 2% for more than a year. Our measures of core have been decelerating. And the economy is in excess supply. So, you know, what that tells us is that, you know, the risk that higher energy prices are going to quickly spread to other goods and services, that looks contained. That doesn't look too high. So, we've got some time, you know, so it made sense to hold today.

We know inflation is going to go up in the near term. I mean, we've all filled up our car. We've seen the prices at the pump. That's going to show up in March CPI. You know, the issue for us is not really the immediate increase in inflation. We know that's going to happen. It's does that start to get generalized, start to spread, start to look more persistent. That's certainly what we're going to be looking for closely. The other thing though we're continuing to look at and assess is the impact of higher tariffs on the economy. The impact of trade uncertainty, the structural change that the Canadian economy is going through. Higher tariffs have weakened the Canadian economy. That will put some downward pressure on inflation. So, you know, we've got to look at the whole situation. We've got to look at how the risks evolve and, you know, we'll take it one meeting at a time.

Okay, we'll stay over here on this side of the room. Mackenzie Gray, please from Global.

Hi there. In this dilemma with the potential inflation risks in Iran and of course the outstanding issues we see around trade with the US. What do you view as the biggest risk between those two issues to the Canadian economy right now?

Well, you know, look, as I said, I think we've got to look at the whole situation of the economy. And, you know, growth and inflation are related. There are also additional cost shocks coming through energy prices. So I don't think it's a matter of sort of saying one thing is bigger than the other. You got to look at the whole thing together. Yeah, I'm not sure I can be much clearer than that.

Okay. And over here Andy Blatchford please from CTV.

Hi Governor. You sort of touched on this, but you mentioned that the longer the conflict goes on, the wider it gets, the bigger the risks are. I'm wondering if you can talk a little bit about what those wider implications are on the economy, what you're most concerned about, and how concerned consumers should be about inflation over the coming months.

Well, look, the first thing I want to say is that, you know, the biggest cost of the war in Iran is a human tragedy, but it's also an economic shock. And you know the fact, in particular the fact that the Strait of Hormuz is essentially closed is cutting off a significant amount of global supply of energy. You know, in Canada that's not affecting us very directly but when there's less supply globally prices are higher globally and you've seen a sharp increase in the global price of oil. Brent's over $100. As I mentioned, WTI was about 98, 99 bucks when I came down.

The impact that will have on economies is going to depend a lot on how long it lasts. And as I mentioned, energy is not the only thing that's going through the Strait of Hormuz. So you know, in the short run, companies have inventories, countries have inventories, they can manage, but the longer it goes those inventories get depleted and that shortage really starts to bite and that's when the economic consequences start to become more, you know, bite more. And as the effects elevate, I think you'd expect to see more impact in financial markets. So the longer it goes, the bigger those effects are likely to be.

You know, as I said, for Canada on the growth side, there's a variety of effects. We're a net exporter of energy. We're a net exporter of fertilizer. So, you know, higher prices means more income coming into the country but for consumers or any business buying those products those costs are up. They're getting squeezed. So, and then look on inflation the impacts in the near term are pretty clear. You know, when we get the March CPI report it's going to show inflation's higher. The issue for us though is not really about the near-term. I realize that's going to impact Canadians. Unfortunately, there's nothing we can, we can't fix the war. What we can do though and what we will do is we will ensure that if energy prices stay high that does not become ongoing, generalized, persistent inflation.

Okay, let's go to the far side of the room now and I'll call on Kevin Carmichael from The Logic, please.

Good morning. The bank's been doing a lot of work on supply shocks since the pandemic. I wondered if you could talk us through how you're applying some of the work that you've been doing to the situation we're in now.

Well, I mean, maybe Kevin, I could say a few words about the things we're watching and I'll ask Carolyn in a minute to say a few words about how we're doing that. You know, as I've highlighted there, there are really two main developments. Obviously, the new development is the war in Iran. And as I've stressed, inflation's going to go up in the near term. What we're focused on is, you know, we need to guard against that spreading to other goods and services and becoming persistent inflation. So what sort of things will we be watching? Well, like obviously you look at the total CPI, that's our target. You know, does that initial increase look like it's persisting? Core measures of inflation are very helpful. You know, core measures will tend to strip out volatile components, you know, like energy. So they'll give you an idea of what's happening to everything else. Is it spreading? If you start to see core moving up a lot that's a sign that it's spreading. We can also look at the whole distribution of price changes. Is it just a few components of the CPI that are driving inflation up or is it many components? The more components, the more worried we'll be getting. And importantly, we'll be looking at inflation expectations.

You know, the other thing which we've been assessing for some time is the impact of tariffs on the economy. And there, I mean, we're looking at how much slack is in the economy, what's happening to employment, what are business investment and hiring intentions. How, you know, are we seeing spillovers from the hard hit sectors to the rest of the economy? And then ultimately, you know, how is that impacting inflation? If that is weakening the economy, how much downward pressure is that putting on inflation? So we'll be using models, and we have been developing models with more sectoral detail. And that's very helpful when you've got a shock that's going to have very different sectoral impacts. We'll also be using various data sources. Why don't you say a few words about how we're actually going to do that?

All right. Next I'll call on Priti Mukherjee from Thomson Reuters.

Good morning Governor. In the opening statement you have said that you will look through the war's immediate impact. I mean can you tell us how long will this immediate be? Two weeks from now, three more weeks or six weeks when we reach your April 29 decision?

Well, you know, I don't think you measure this in weeks. I think, I mean, we get CPI data monthly. Most of our data comes monthly. So, you know, we're not looking at this in terms of weeks. The, you know, as Carolyn just underlined, you know, we're starting in a situation where inflation is close to target, core measures have been decelerating, there's excess supply in the economy. So we've got some time to assess. We don't think, you know, against that background, we don't think we're going to see rapid pass-through of higher energy prices into broader prices of, you know, broad goods and services prices. So, we've got some time to make that assessment.

And, you know, we've just outlined the things that we'll be looking at. And, you know, as I underlined, you got to look at the situation of the whole economy. Obviously we're going to be looking at developments in Iran. You know, how disruptive is it? How high, you know, what happens to energy prices? How high do they stay for how long? That's not the only thing going on in the economy. We're facing higher tariffs. There's still a lot of trade uncertainty. We'll be assessing that part as well.

You know, I mean, looking forward, I don't think I can say it any clearer. You know, as those risks evolve, as the economy plays out, we're prepared to respond as needed. You know, what does that mean? Well, I mean, yes, we could keep holding the interest rate where we are. But look, if energy prices stay high and we start to see evidence that is generalizing and becoming more persistent, we can raise the policy interest rate to cool inflation. On the other hand, if energy prices come back down, we see weakness in the economy, we see more weakness in the economy, we can lower our policy rate to add more support. You know, I think the message is there's a lot of uncertainty there. We'll be following those developments carefully and we'll respond as needed.