Bank of Canada Governor Tiff Macklem spoke after the bank kept its policy rate at 2.25%. He said decisions will be made one meeting at a time, with time to assess the Iran conflict and its effect on the economy. Macklem said the conflict’s impact on Canada depends on how long it lasts and could change the mix of growth. He said the bank is using high-frequency, near-term data and is improving how it judges supply shocks.

Inflation And Growth Risks

He said a sharp rise in petrol prices will lift total inflation in coming months and the Middle East conflict will raise global inflation in the near term. The BoC said near-term Canadian growth looks weaker than expected in January, with growth risks tilted to the downside while inflation risks have increased. Macklem said the BoC does not expect rapid pass-through from higher energy prices, but could raise rates if energy prices drive persistent inflation. He said rates could be cut if energy prices fall and the economy weakens. Ahead of the decision, markets expected rates to stay at 2.25%, with about 10 bps of hikes priced for this year and about 42 basis points of tightening by end-2026. After the decision, USD/CAD revisited the 1.3710–1.3720 area, with USD/CAD above 1.3700. The Bank of Canada is signaling a readiness to act in either direction, creating significant uncertainty. With growth risks tilted down but inflation risks up, the path for interest rates is not clear. This environment suggests that volatility in Canadian markets is likely to increase in the coming weeks.

Energy Shock And Market Positioning

We see that the conflict in Iran is the main driver, pushing global energy prices higher. Recent reports show WTI crude oil has breached $95 a barrel, a level not seen since the conflict began and reminiscent of the spikes in 2022. Governor Macklem has been explicit: if these prices lead to persistent inflation, the Bank is prepared to raise its 2.25% policy rate. However, domestic data points to a slowdown that complicates any decision to hike. The latest retail sales figures for January 2026 showed a contraction of 0.5%, confirming the Bank’s view that near-term growth will be weaker. This puts the focus squarely on incoming data to see if inflation is becoming broad-based or if the economy is faltering. Traders should therefore be positioned for a spike in volatility around the next Consumer Price Index release. The February CPI report showed core measures remaining stubbornly above the 2% target, even as the headline number dipped to 1.8% before the recent energy surge. A high print for March could force the Bank’s hand, making options on short-term interest rate futures particularly sensitive. For currency traders, this situation currently favors continued weakness in the Canadian dollar. While high oil prices are normally a tailwind for the CAD, the stronger US dollar and Canada’s slowing domestic economy are more powerful forces, keeping USD/CAD elevated above 1.3700. We could see a test of the March high of 1.3752, with a move toward the 200-day moving average near 1.3800 possible if US economic data remains strong. Given the two-sided risk presented by the Bank, strategies that benefit from price movement itself are attractive. Buying options to hedge against a surprise hike or an unexpectedly sharp economic downturn could prove prudent. The Bank has given itself maximum flexibility, meaning traders should prepare for anything rather than betting on a single outcome. Create your live VT Markets account and start trading now.

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