Published on: March 19, 2026
North American central banks announced their respective policy rate decisions on Wednesday. As expected, the Bank of Canada (BoC) kept its rate at 2.25%, while the US Federal Reserve (Fed) maintained a target range of 3.50% to 3.75%.
The Bank of Canada is closely monitoring the outcome of the war
In the press release issued following its decision, the Bank of Canada cited the increased volatility in global energy prices and financial markets resulting from the war in Iran. It stated, however, that it is “prepared to respond” as the geopolitical situation evolves.
Governor Tiff Macklem noted that the situation in the Middle East raises concerns about another significant rise in the cost of living. In his opening statement, he also noted that “inflation in Canada has been approaching the 2% target for over a year, but as we can see, the war in Iran is causing oil prices to spike, which will fuel inflation in the short term.”
Here are some observations made by the BoC in its decision:
Given the uncertainty caused by the current surge in energy prices, the statement released this morning by the Bank of Canada comes as no surprise. The central bank acknowledged the impact of a certain base effect on Canadian inflation, noting that inflationary risks would clearly increase going forward. In our view, the current oil shock will only add another layer of inflationary pressure to inflation fundamentals that were already deteriorating. Prior to the oil crisis, we had identified the multiple underlying factors that would cause overall CPI inflation to fluctuate from month to month, based on what had occurred twelve months earlier, but on a rolling basis.
Since we first covered this topic in mid-February, the inflation situation in Canada has deteriorated further. While job creation has been extremely weak recently, the Canadian economy has just recorded its strongest wage gains in four years. This is happening precisely as productivity growth is slowing down. The month-over-month increase in average hourly earnings (AHE) was around 1.0% in February. Job growth is therefore slowing on a year-over-year basis, but AHE are accelerating and are now twice the inflation target. These wage gains were observed among the most economically active age groups, namely those aged 25 to 54, who account for the bulk of Canada’s wage bill given their weight in total employment.
Recently, the Bank of Canada also released information that echoes our concerns regarding the inflationary impact of negative supply-side shocks, specifically weak productivity growth. This means that the Bank is actively discussing this issue behind closed doors. Unfortunately, price stability has not been achieved at all in Canada if we exclude the relative price shocks that distort the CPI. Monetary policy seems too expansionary on this side of the border, and the current oil shock will only add fuel to the fire. We maintain our forecast that the Bank of Canada will tighten monetary policy in the second half of 2026, provided that oil prices do not rise enough and remain high for long enough to put an end to the US economic cycle, which would also mean a recession in Canada.
Discrepancy between the Fed’s official rhetoric and forecasts
The US Federal Reserve justified its decision by citing the uncertainty surrounding the war with Iran, which began nearly three weeks ago. The fighting and its impact on the Strait of Hormuz have disrupted the global oil market and threatened to keep inflation above the Fed’s 2% target.
As in January, Governor Stephen Miran expressed his disagreement, arguing in favour of a quarter-point cut amid growing concerns about the job market. Governor Christopher Waller, who had previously joined Mr. Miran in supporting a reduction, voted for the status quo this time.
The Fed continued to point to weak job creation and the ongoing impact of tariffs, which have kept inflation somewhat above target. The main change noted in the release is the mention that the repercussions of the evolving situation in the Middle East on the US economy are uncertain. This suggests that the updated inflation forecasts released today could be revised depending on the duration of the conflict.
The announcement of the Fed’s decision was accompanied by an update of its economic forecasts. Here are a few highlights:
To put it mildly, today’s press conference was rather confusing. During the Q&A session, Chairman Powell fully validated, point by point, our current model, or analytical framework, for forecasting inflation in this very specific context. Forecasting inflation is complex because it depends on many factors, based on the relative contribution of each component that can vary considerably over a 12-month period. During the Q&A session, Chairman Powell made it clear that the US labour market was disinflationary due to productivity gains, that the services sector (both housing and non-housing) was on track toward price stability, and that 2026 would be the year in which the base effect related to tariffs would reverse. He believes this reversal will occur by summer, a scenario we have discussed with our clients on several occasions since last fall.
Nevertheless, the Fed’s inflation forecasts are completely at odds with ours. We end up with CPI inflation of 2.2% year-over-year in the fourth quarter of 2026, assuming we maintain the average oil price at $100 over the three-month period of March, April, and May. This would lead to energy deflation, as the end of the war or the reopening of the Strait of Hormuz would have a deflationary effect given the market conditions (excess supply) prior to the war.
Given the discrepancy between the projections and the president’s remarks during the Q&A session, we conclude that he is clearly indicating that these forecasts should be taken with a grain of salt. If the Fed attaches as much importance as we do to the same dynamics, by definition, since this is merely a mathematical calculation (the projected year-over-year inflation rate for each component multiplied by its weight), shouldn’t we come to similar conclusions regarding inflation?