The Bank of Canada held its benchmark lending rate at 2.25 per cent for the fourth consecutive time, with many economists saying the price of oil will dictate the future trajectory of rates based on “hawkish” warnings from Tiff Macklem , the central bank’s governor.

Policymakers also released a new Monetary Policy Report (MPR) that updated projections for Canadian economic growth this year to 1.2 per cent from 1.1 per cent and to 1.6 per cent from 1.5 per cent next year.

The Bank of Canada upped its estimate for headline inflation , but cut its core inflation forecast for the end of the year. It also laid out a scenario where the price of oil stays stuck at US$100 a barrel.

Here’s what economists think the Bank of Canada’s latest decision and the MPR mean for rates.

Watch out for $100 oil: Desjardins

“Overall, the Bank of Canada appears comfortable leaving rates unchanged for the rest of the year, unless oil prices remain high,” Royce Mendes, managing director and head of macro strategy at Desjardins Group , said in a note.

Currently, policymakers are assuming the price of Brent crude will fall to US$75 a barrel by mid-2027, while West Texas Intermediate and Western Canadian Select will drop to US$70 and US$60, respectively.

In the near term, they don’t think elevated oil prices will boost gross domestic product or trigger core inflation to rise.

The Bank of Canada said households and businesses will be hit by higher energy prices, even though some governments and regions will reap benefits.

But Mendes said policymakers also “implied that their operational target, underlying inflation, won’t be impacted.”

However, under a scenario where oil rises to US$100 a barrel, Macklem said rate hikes could be necessary if higher prices leach “more persistently” into inflation.

Otherwise, if the base case rolls out as assumed, Desjardins expects the Bank of Canada to start hiking rates to 2.75 per cent, but not until 2027.

‘Increasingly mean year’: RSM

“Elevated uncertainty and financial market volatility at this juncture are such that the Bank of Canada does not have sufficient information that warrants a policy change in either direction,” Joe Brusuelas, chief economist at RSM LLP, said in a note.

But policymakers won’t be able to wait forever.

If the conflict between the United States and Iran continues into the second half of 2026 and global energy supplies remain blocked, he said the central bank will no longer “have the luxury of looking through inflationary pressures for long.”

Brusuelas said he thinks the Bank of Canada will have to lay out “a likely policy path” at its next meeting on June 10 since the economy is stuck in a cycle of ongoing slack and high unemployment.

“Policymakers will need to tread carefully going forward and prepare both the public and investors for what is looking like an increasingly mean year,” he said.

‘Hawkish’ tone: Capital Economics

“The Bank of Canada’s decision to again keep its key policy rate at the bottom of its 2.25 per cent to 3.25 per cent neutral range estimate came as no surprise,” Bradley Saunders, North America economist at Capital Economics Ltd. , said in a note. “The primary focus was therefore on the updated projections in the newest edition of the MPR.”

Capital Economics said the Bank of Canada is overestimating the economy’s ability to hit its revised GDP targets and is calling for growth of sub-one per cent for the year, especially given that the U.S. has indicated it wants to strike a bilateral trade deal with Canada alongside a potentially renewed Canada-U.S.-Mexico Agreement.

It also said the spending spree on infrastructure projects announced by the federal government won’t do much to boost the economy in the near term.

More alarming was the “hawkish” tone of Macklem’s opening comments when he said inflation expectations have moved up and there may be a need for rate hikes if high oil prices persist. The Bank of Canada is assuming that its increased growth projections will also hoover up any slack.

“With (West Texas Intermediate) back above US$100 per barrel for the first time in over a fortnight and negotiations between the U.S./Israel and Iran seemingly at a standstill, there are growing risks to our view that the first interest rate hike will come in 2027,” Saunders said.

• Email: gmvsuhanic@postmedia.com

  • Bank of Canada holds interest rate at 2.25% amid Iran war oil price spike
  • What Bank of Canada’s Macklem and Fed-nominee Warsh get wrong about productivity and interest rates, says Desjardins