This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on March 18, 2026.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on March 13, 2026. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, Rhys Mendes and Michelle Alexopoulos.
International economy
Governing Council began its deliberations by discussing recent developments in the global economy and the implications for the outlook. Global growth had continued to track at about 3%, as had been expected in the January Monetary Policy Report. However, the start of the war in Iran had increased uncertainty around the global outlook. Energy prices had risen sharply, which will boost inflation around the world. Members agreed that the impact of the conflict on global growth and inflation will depend on the duration of the conflict and the extent to which it spreads across the Middle East.
Members also noted a new development in global trade—the US Supreme Court’s ruling that the tariffs imposed under the International Emergency Economic Powers Act were illegal and the US administration’s plans to replace tariffs through other means. They agreed that this had no direct implications for sectoral tariffs on Canadian exports and that trade-related risks to Canada remained unchanged since January.
In the United States, indicators of economic activity had moderated since January but remained solid. The effects of the US government shutdown on consumption and government spending were temporary and led to slower growth in the fourth quarter of 2025. Economic activity was expected to pick up in the first quarter to average about 2% over the two quarters. The US outlook for 2026 remained in line with the projection in the January Report, driven by consumption and strong investment in artificial intelligence (AI). Investment outside the AI sector was subdued, and exports remained weak. The labour market had softened slightly, with some indicators suggesting there could be more slowing. US inflation had risen in recent months, driven partly by previously announced tariffs that had passed through to prices of core goods. US inflation was expected to pick up in the second quarter as the conflict in the Middle East was pushing up energy prices.
In the euro area, recent data had been mixed and did not alter the overall outlook relative to the January Report. Domestic demand and steady labour markets had continued to support growth. Members noted that the inflation outlook in the euro area was vulnerable to the energy price shock, particularly given the euro area’s reliance on liquefied natural gas imports.
Growth in China had continued to be driven by strong exports, partially offset by weak domestic demand.
Since the war in Iran began, global financial conditions had tightened from previously accommodative levels. Global bond yields were higher, stock markets were lower, and credit spreads were wider. Members acknowledged that the tightening was modest and that financial markets had been relatively orderly despite a sharp increase in volatility.
Members discussed the disruptions to oil and gas supplies caused by the Middle East conflict, the sharp rise in global energy prices that followed and the probable impact on the global economy. They noted that the impact on inflation would vary across jurisdictions—the effects would be more pronounced in energy-importing economies, such as the euro area and much of Asia, than in net energy exporters. Members also discussed the risk that disruptions to shipping through the Strait of Hormuz could raise the costs of other commodities, such as fertilizer. Risks to global growth and inflation would depend on the duration of these disruptions and the extent of disruptions to regional production.
Members discussed whether the risks of second-round inflation effects from the energy price shock might be more limited today relative to some historic episodes. The global economy now uses less oil per unit of output, limiting the pass-through of the oil price increase to prices of non-energy goods and services. And the risks of wage-price spirals and de-anchoring of inflation expectations are likely lower today because of structural changes in the labour market and years of experience with inflation-targeting monetary policy frameworks. But members acknowledged that the public’s perception of inflation remained high after the 2022 spike and that gasoline prices have historically had a large impact on households’ assessment of inflation.
The Canadian dollar had remained relatively stable against the US dollar, at just above 73 cents. But it had strengthened together with the US dollar against most other currencies since the start of the Middle East conflict.
Canadian economy and inflation outlook
Governing Council then turned its attention to recent economic developments in Canada. After robust growth in the third quarter of 2025, gross domestic product (GDP) had decreased by 0.6% in the fourth quarter, but this was mostly due to a large inventory adjustment. Final domestic demand had remained solid.
Data since the January Report suggested that the economy would expand in the first half of 2026 but more slowly than had been expected. Members agreed that the energy price shock caused by the war in Iran would push inflation up in the near term. At this early stage of the conflict, the impact on economic growth was uncertain.
To assess the state of the economy before the energy price shock, Governing Council discussed the most recent economic indicators. Retail trade data and other indicators suggested consumption was expanding at a solid pace. But overall, economic activity appeared to be slower than expected in the January Report.
Members noted continued weakness in the housing market, concentrated in Toronto and Vancouver. Prices had declined, and resale activity had remained subdued.
Goods exports had fallen more sharply in January than had been expected due to large declines in exports of gold, motor vehicles and aircraft. Members noted that most of the export weakness had been driven by temporary factors that should unwind in coming months. Nevertheless, looking through the volatility, export growth in the first quarter appeared on track to be weaker than had been forecast in January.
Employment declines in January and February offset much of the gain seen in the fourth quarter of 2025. Members acknowledged that they had been expecting ongoing softness in the labour market. Job losses were broad-based across industries, were mostly in the private sector and mainly affected full-time workers. The data pointed to continued weakness in industries most exposed to trade as well as in other sectors, such as wholesale and retail trade. Wage growth had evolved in line with expectations.
Governing Council then turned to assessing inflation and signs of inflationary pressures as they were before the impact of the energy price shock. The latest reading showed total consumer price index (CPI) inflation had eased to 1.8% in February from 2.3% in January, in line with expectations and reflecting the unwinding of the GST holiday a year earlier. CPI excluding changes in indirect taxes was 1.9%, and measures of core inflation had decelerated and were approaching 2%. Members welcomed the more benign inflation environment but noted that it would be short-lived because headline inflation was expected to rise in the coming months with higher gasoline prices. They also discussed how high energy and fertilizer prices might spill over to the prices of other goods and services, such as air transportation and food.
Members discussed the channels through which the shock could affect the Canadian economy. Because Canada is a net energy exporter, higher oil prices would increase export revenues, raise incomes and thereby support GDP. However, higher gasoline prices could restrain consumer spending and add costs for many businesses. The impacts on the economy and inflation would also depend on how the exchange rate responded to the change in oil prices and on financial conditions.
Members agreed that these effects could shift the composition of growth. But it was too early to assess their net impact on the growth outlook given the acute uncertainty surrounding the duration and scope of the conflict in Iran.
Considerations for monetary policy
Governing Council discussed at length what the recent economic developments implied for the stance of monetary policy.
Members assessed the balance of risks to the outlook. The war in Iran had clearly added a new layer of uncertainty, but they agreed that they should not lose sight of the other risks already facing the economy: shifting US trade policy, the upcoming review of the Canada-United States-Mexico Agreement, and ongoing structural changes.
With no indication of whether the Middle East conflict would end quickly or persist for some time, members agreed that it was too early to discern the net impact from the combination of these forces. They noted that the range of possible outcomes for the Canadian economy had widened further since the January Report.
Members exchanged views on the relative importance of the different risks to the inflation outlook. One perspective emphasized that the near-term increase in total inflation would raise inflation risks over the projection horizon. Higher gasoline prices, combined with still-elevated inflation in essentials such as groceries, could push up inflation expectations. This was particularly relevant given that the experience with high inflation in 2022–23 remained fresh in people’s minds. Members also noted, however, that beyond the short run, the impact of higher energy prices on ongoing inflation could be limited. The economy was starting from a position of excess supply, with inflation around target, which could limit the pass-through of energy costs to other goods and services. They discussed the extent to which these underlying conditions matter for how inflation expectations influence price and wagesetting behaviour. Typically, higher inflation expectations make it easier for businesses to pass along cost increases. But when the economy is soft, firms often look for ways to avoid raising prices so that they don’t lose customers. Similarly, upward pressure on wages is less likely in a weak economy.
Overall, members agreed that it was too early to tell how these risks would evolve. They agreed that, in the near term, risks to growth looked tilted to the downside while the oil price shock represented additional upside risk to inflation.
Members considered the role of monetary policy when a supply shock hits the economy. They noted that inflationary pressures from higher energy prices were expected to push inflation above target with the economy in excess supply. This presents a difficult trade-off for monetary policy. On the one hand, raising the policy rate to bring down inflation could weaken the economy further. On the other hand, lowering rates to support the economy could risk pushing inflation even higher.
Members drew on recent analytical work undertaken at the Bank on conducting monetary policy when faced with supply shocks, summarized in Deputy Governor Sharon Kozicki’s recent speech. They discussed ways to diagnose the supply shock and assess the risks. These approaches include using new enhanced models, conducting scenario analysis, closely monitoring high-frequency data and microdata for signs of firms adjusting prices and continued outreach with businesses.
Policy decision
Considering the latest developments, Governing Council assessed the stance of monetary policy.
With the potential for weaker near-term growth and upside risks to inflation from higher energy prices, Governing Council members believed it was too early to assess the impact on the outlook and how these risks would materialize. They therefore agreed to hold the policy interest rate unchanged at 2.25%.
Members agreed it would be important to communicate to Canadians that they would look through the immediate effect on inflation of the oil price shock. But they would respond, if needed, to ensure that price increases did not spread to other goods and services and become persistent inflation. They agreed that they had some flexibility because inflation was close to target and core measures suggested limited pressures. They could therefore take some time to see how the war in Iran evolved and what it meant for the outlook.
At the same time, they acknowledged that they would need to rely on judgement more heavily than usual and take a risk management approach to monetary policy. They agreed to keep options open while closely monitoring the unfolding conflict in the Middle East, US trade policy and incoming data. Members agreed that they should be ready to respond as needed as the outlook evolved.