Not shocking at all. Today’s decision by the Bank of Canada to hold its policy rate at 2.25% was widely expected. It was also our call.

The Bank has been on the sidelines for three straight meetings, hanging out at the lower bound of its neutral range of 2.25-3.25%.

At the risk of oversimplifying, two major developments factored into today’s hold decision.

The first, and most important, factor is the war in the Middle East. The blocking of the Strait of Hormuz and the damage to production facilities has caused the price of oil, Asian and European natural gas and fertilizer to spike. This will feed through other prices (like food), given that so many of our purchases are transported large distances and now face higher input costs. The bottom line is that we will see higher inflation readings in the coming months.

From the press conference: “The sharp increase in global energy prices is causing higher prices at the pump, which will push up inflation in the coming months.”

If only… The war comes at a time when the recent (albeit lagged) inflation numbers have been cooperating. Last month’s headline CPI reading came in at 1.8% year-over-year. More importantly, the main core measures (median and trim) were just over 2% - the lowest since 2021. Progress indeed, but it’s really the calm before the inflation storm.

From the press conference: “CPI inflation excluding taxes and measures of core inflation have also come down and are all now close to 2%.”

The second factor is the Canadian economy. Recent data has been disappointing, including a mild GDP contraction in 2025Q4 and last month’s job loss of 84K. The combination of a weak economy and cooling inflation could have even put a cut on the table. But that’s before the new inflation shock.

From the press release: “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.”

On balance, we maintain our view that the Bank of Canada will stay on hold this year. The inflation pressures from the war are too large to ignore, and yet it’s unclear how long the conflict will persist. The Bank will see through a short-term spike in inflation above its target, but will get more concerned if the shock persists -- particularly if higher energy prices feed through the broader inflation basket. At the same time, an underperforming economy will make the Bank reluctant to raise rates. The Bank is in a tricky spot. But keep in mind that even before the war, we weren’t expecting the Bank of Canada to come to the economic rescue by cutting rates. Other policy levers outside its control, like accelerating major projects, will need to be pulled.

John Mayer sings “We keep on waiting...waiting on the world to change." For the Bank of Canada, they’ll want a lot more clarity on the war, and for some fog to clear, before making its move off the sidelines.

Above all things, the Bank wants you to know that they are committed to price stability -- which means keeping underlying inflation over time near its 2% target.

The Bank’s press release ends with this: “The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”  

Answer to the previous trivia question: The U.S. sitcom “Full House” premiered on ABC in 1987 and ran for eight years.

Today’s trivia question: When was the last time the Bank of Canada’s policy interest rate (a.k.a. target for the overnight rate) was above 5%?