BoC says jobs created late last year ‘largely reversed’ in first two months of 2026
The Bank of Canada is keeping its benchmark interest rate unchanged at 2.25 per cent, opting for stability as the economy grapples with weaker growth, a softer labour market and a fresh shock from war in the Middle East that is driving up energy prices and roiling financial markets.
In a rate decision and opening statement released Wednesday morning, the central bank said it will hold the overnight rate at 2.25 per cent, with the Bank Rate at 2.5 per cent and the deposit rate at 2.20 per cent. The Bank has left the policy rate at this level since October, choosing not to cut despite mounting evidence of excess capacity at home.
Governor Tiff Macklem said Canada is now facing “heightened uncertainty related to US trade policy and geopolitical risks,” noting that “the war in Iran has added a new layer of uncertainty.” The impact on both global and Canadian growth, he cautioned, will depend on how long the conflict lasts and how far it spreads across the Middle East.
Global backdrop shifts with war and tariffs
Before the latest conflict, the Bank said, the world economy was on track to expand by roughly three per cent this year, in line with its January Monetary Policy Report. Growth in the United States has cooled but “remains solid,” driven by consumer spending and “strong AI-related investment.” In the euro area, domestic demand is doing much of the work as exports sag, while China’s growth is being supported by exports against a backdrop of weak domestic demand.
Since fighting erupted in the Middle East, global oil and natural gas prices have “risen sharply,” a move the Bank expects will lift headline inflation around the world in the near term. The effective closure of the Strait of Hormuz is creating transportation bottlenecks that could disrupt other key commodities, including fertilizer. At the same time, global financial conditions have tightened: bond yields are up, equity markets are down, and credit spreads have widened.
Despite the turbulence, the Bank notes that the Canada–U.S. dollar exchange rate has stayed relatively stable. However, it continues to flag U.S. tariffs and trade policy uncertainty as a key drag on Canada’s medium-term growth prospects.
Canadian growth stalls, labour market softens
Recent data show the Canadian economy lost momentum at the end of last year. After growing 2.4 per cent in the third quarter of 2025, GDP fell 0.6 per cent in the fourth quarter, a weaker performance than the Bank anticipated in January. The central bank attributes most of that shortfall to a larger-than-expected drawdown in inventories, while pointing out that domestic demand actually rose more than two per cent, supported by consumer and government spending. Housing activity, however, “remained weak.”
So far in 2026, the economy appears to be growing again, but more slowly than previously forecast. The Bank says the economy “remains in excess supply,” with a softening labour market. Jobs created late last year were “largely reversed” in the first two months of 2026, and the unemployment rate climbed to 6.7 per cent in February.
Trade data have been volatile but point to continued weakness in exports.
“We continue to expect the Canadian economy to grow modestly as it adjusts to US tariffs and trade policy uncertainty, but recent data suggest that near-term economic growth will be weaker than anticipated in January,” the Bank said. It also stressed that it is “too early to assess the impact of the conflict in the Middle East on growth in Canada.”
Inflation near target but set to bump higher on energy
Headline inflation has been hovering near the Bank’s two per cent target for more than a year and moved lower again in February. CPI inflation eased to 1.8 per cent, down from 2.3 per cent in January. Measures of core inflation and CPI excluding changes in indirect taxes have also declined and “are all now close to 2%,” the Bank said.
Food inflation slowed in February but “remains elevated.” The Bank warned that the “sharp increase in global energy prices has led to increases in gasoline prices, and this will push up total inflation in the coming months.” Macklem echoed that message in his opening statement, saying that “the war in Iran is causing oil prices to move sharply higher and this will push up inflation in the short term.”
The Bank is trying to balance this renewed inflation pressure against the reality of an economy operating below potential. “Canada’s economy is dealing with a lot, and now we face more volatility. The Bank of Canada’s role is to be a source of stability,” Macklem said. “We’re supporting economic activity while ensuring that a jump in energy prices doesn’t turn into persistent inflation.”
A policy dilemma: weak growth, rising price risks
Policymakers described the current environment as unusually uncertain, citing both the review of the Canada–United States–Mexico Agreement (CUSMA) and the evolving conflict in the Middle East. Compared with January, they see “risks to economic growth…tilted to the downside,” while “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,” Macklem said. “Raising 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.”
For now, the Bank judges that with inflation near target and excess supply in the economy, the risk that higher energy prices quickly spill over into broader price pressures “looks contained.” But the longer the conflict lasts and the more it broadens, the greater the danger that those effects could become entrenched.
Governing Council ultimately decided to “look through the war’s immediate impact on inflation,” maintaining the policy rate at 2.25 per cent while signalling its willingness to act if needed. “As the outlook evolves, we stand ready to respond as needed,” Macklem said. “The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”
