The Bank of Canada left its benchmark interest rate at 2.25 per cent, saying there is “little evidence” at this stage that higher oil prices represent a serious inflation threat. The central bank also updated its economic outlook, predicting marginally stronger growth of 1.2 per cent this year and 1.6 per cent in 2027. 

Choose your adventure: The Iran war had barely begun when the central bank last set policy in March. There’s a ceasefire, but shipments of oil, gas, fertilizer and other key inputs remain blocked. Meanwhile, U.S. duties continue to constrain exports, while the long-term status of the North American trade agreement remains uncertain. Either or both of those situations could be resolved at any time with a phone call. They could also persist for weeks or months. 

The central bank decided to go with a baseline forecast that has the Brent oil price dropping to US$90 in the second quarter, and then US$75 by the middle of 2027. If that holds, governor Tiff Macklem said a benchmark rate “close to current settings” would probably keep the spike in gasoline prices from turning into a broad-based inflation scare. Some tinkering might be necessary, he said, but any changes would be “small.” 

Higher oil prices are broadly a wash for the Canadian economy because gains from exports offset the pain of elevated costs. There’s nothing ambiguous about the effect of U.S. tariffs. The economy continues to muddle along, but Macklem observed that if duties rose, he might have to cut interest rates. Then again, the central bank’s assumption that it can control inflation with rates where they are could be wrong. “If this starts to happen, monetary policy will have more work to do—there may be a need for consecutive increases in the policy rate.” 

An illustrative scenario: The Bank of Canada acknowledged that its assumption that oil prices will steadily fall from current levels might be a heroic one. To demonstrate that it’s alive to all that could go wrong, the central bank sketched what could happen if the situation in the Middle East persists. 

If oil prices stayed at US$100 through 2028, growth still would be little changed compared with its updated estimates because it would take time for the gains—primarily through higher government royalties and tax revenue—to spread through the economy. Inflation pressures would be stronger and immediate, forcing the Bank of Canada to raise interest rates, thus dampening the positive effect of higher prices on growth. 

“Of course, these are not the only possible outcomes,” Macklem said in a statement. “As the outlook evolves, we stand ready to respond as needed.” 

One small number: Every spring, the Bank of Canada updates its estimate of how fast the economy can grow before demand would outstrip supply and exert upward pressure on inflation. The new speed limit—called “potential output,” which is derived from trends in labour growth and productivity—is 1.2 per cent for 2026, 1.3 per cent for 2027 and 1.5 per cent for 2028. That means that Canada’s economy lacks the capacity to grow much faster without causing the central bank to worry about inflation. For now, we might be stuck here.

Correction: The Bank of Canada predicts growth of 1.6 per cent in 2027, and estimates potential output of 1.2 per cent in 2026, 1.3 per cent in 2027 and 1.5 per cent in 2028. This story has been updated.