Middle East conflict raised inflation risks without upending rate path yet
Canada’s latest oil shock piled fresh pressure on households and lenders, but forecasters still see a soft‑growth, steady‑rates path rather than a repeat of 2022’s painful squeeze.
Energy shock seen as smaller than last crisis
In a new research briefing, Oxford Economics said the US–Israel war with Iran would push up prices and uncertainty in the coming months but is “unlikely to derail Canada's economy.”
“A temporary surge in global energy and commodity prices will likely push headline inflation to the mid-3% range in Q2 2026,” director of Canada economics Tony Stillo and senior economist Michael Davenport said, “but we've nudged down our GDP growth forecast by just 0.1ppts to 1% in 2026 and by 0.2ppts to 1.9% in 2027.”
They noted that “this is a smaller supply shock than in 2022, and Canada's economy is operating with excess supply, making substantial pass-through to core consumer prices unlikely,” although “the risk of persistently higher inflation will rise the longer the conflict and supply disruption drag on.”
Oil production and trade flows cushioned the blow
Higher crude prices delivered some support to Canada as a producer economy. Oxford Economics highlighted that stronger output “will provide a modest near-term lift to the economy,” pointing to federal plans to supply an additional 23.6 million barrels of oil as part of the International Energy Agency’s coordinated release and industry announcements of “output increases of 140,000 b/d – around 2.5% – in April.”
The firm estimated that spare pipeline and rail capacity could allow 200,000–500,000 barrels per day of extra exports in the near term.
Doug Porter of Bank of Montreal says geopolitical uncertainty and climbing Government of Canada yields are weighing on housing demand. He expects the Bank of Canada to hold rates despite market speculation around hikes.https://t.co/0YxXVyfCnM
— Canadian Mortgage Professional Magazine (@CMPmagazine) March 20, 2026
BoC expected to look through oil spike
The Bank of Canada revealed its decision to hold its policy rate steady in March, keeping interest rate at 2.25% amid concern about a possible inflation flareup from the war.
Oxford Economics said it expects the central bank to “look through the energy price shock, provided it remains temporary.”
“Overnight index swap markets have priced in about 50bps to 70bps of BoC policy rate hikes this year, but we think it's much more likely that the BoC holds the overnight interest rate at its currently slightly stimulative level for the rest of 2026,” Stillo and Davenport said.
That view broadly aligned with BMO’s Douglas Porter, who described a 2026 hike as “a very long shot indeed, with the economy struggling to grow, core inflation moving closer to the 2% target, and USMCA uncertainty still clouding the outlook,” and with economists who expect the overnight rate to hold near 2.25% through next year.
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