Conflicting inflation and demand pressures made the Bank of Canada's steady hand the prudent choice
The Bank of Canada's decision to leave its policy rate unchanged last week drew backing from the C.D. Howe Institute, which argued that a tangle of opposing economic forces made any move in either direction difficult to justify.
Writing in a new commentary, C.D. Howe researchers said the central bank was wise to stand pat despite a rise in inflation to 2.4% in March, up from 1.8% in February.
The think-tank pointed to a set of crosscurrents — from Middle East-driven supply disruptions to softening domestic demand — that have made assessing the economy's output gap, a key input for monetary policy decisions, unusually difficult.
"These uncertainties, when taken together, create both upward and downward pressure on inflation, making the job of a central bank all the more difficult," the institute said.
For Canadian mortgage brokers tracking the rate environment, the message is one of prolonged uncertainty. The Bank has now held rates steady at consecutive meetings, and the C.D. Howe analysis suggests the conditions for a clear pivot in either direction have yet to materialise.
Read more: Don’t expect a BoC rate cut in 2026 – and maybe not 2027, either
Sal Guatieri, director and senior economist at Bank of Montreal Capital Markets, expects interest rates and mortgage rates to remain largely stable as inflation stays near target levels and policy rates hold steady.https://t.co/GlhgVD3rF7
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 5, 2026
Supply squeeze meets demand softness
The institute identified a negative supply shock stemming from the ongoing Iran conflict, which has disrupted flows of oil and fertiliser through the Strait of Hormuz.
That disruption is squeezing productive capacity across industries reliant on those inputs and adding pressure to food prices that were already elevated heading into 2026.
The concern, C.D. Howe noted, is that de-anchoring inflation expectations — which have not yet returned to their pre-pandemic baseline — could force the Bank to tighten sooner than it might prefer, even amid softening conditions elsewhere.
On the demand side, however, the picture looks considerably weaker. Manufacturing output has been trending downward for three years. Housing markets are cooling in several major urban centres.
Employment fell in the first quarter of 2026, with core-age workers between 25 and 54 accounting for just over 50,000 of the jobs lost.
Business investment remains cautious ahead of the July 1 review of the Canada-United States-Mexico Agreement, a review that carries meaningful downside risk if negotiations sour.
Read more: Bank of Canada shadow council backs year‑long rate hold
Population decline adds a rare complication
C.D. Howe flagged an additional, longer-run complication that rarely enters rate discussions: Canada's population shrank from January 2025 to January 2026, the first yearly decline since Confederation.
The drop, driven largely by reductions in temporary foreign workers and international students, is already showing up in rental markets, where average rents fell 5.3% in the year to March 2026.
In Toronto's condominium market and even parts of Greater Vancouver, prices have declined — a combination that threatens to deter developers from launching new multi-dwelling projects despite government incentives to build.
A contracting population, the institute noted, raises the probability of recession by reducing the pool of consumers driving purchases across the economy.
Fiscal measures add further fog
Last week's federal fiscal update included new economic stimulus measures, though C.D. Howe cautioned that the scale of any boost remains uncertain. That ambiguity, layered atop an already opaque output gap, reinforces the case for a cautious and data-dependent central bank.
The institute's conclusion was unambiguous: with supply and demand signals pulling in opposite directions, and with the output gap difficult to measure precisely, the Bank of Canada made the right call in holding.
Whether that patience can be sustained into the second half of 2026 will depend heavily on how the CUSMA review resolves and whether inflation expectations can be reined in without a significant tightening of credit conditions.
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