Bank of Canada Holds Policy Rate Steady

General Kim Franz 18 Mar

Today, the Bank of Canada once again held the policy rate steady at 2.25%. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary. With inflation hovering just under 2% and core inflation falling to 2.3%, the Governing Council sees the current overnight rate as appropriate, as the Bank looks through the inflationary effects of the war in Iran.

Economic activity has slowed amid the 19-day-old war, with widespread supply disruptions. “Since the outbreak of the conflict in the Middle East, global oil and natural gas prices have risen sharply, and this will boost global inflation in the near-term. In addition to energy supply disruptions, transportation bottlenecks stemming from the effective closure of the Strait of Hormuz could impact the supply of other commodities, such as fertilizer. Financial conditions have tightened from accommodative levels. Global bond yields have risen, equity market prices have declined, and credit spreads have widened. The Canada-US dollar exchange rate has remained relatively stable.”

The labour market in both Canada and the U.S. remains soft. ” Employment gains in the fourth quarter of 2025 were largely reversed in the first two months of 2026, and the unemployment rate rose to 6.7% in February. Looking through the volatility, recent data also suggest ongoing weakness in exports. It’s too early to assess the impact of the conflict in the Middle East on growth in Canada.”
Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty. At the same time, Canada is working hard to establish alternative trading partners. Even the vast Chinese market cannot replace the US in terms of proximity and cost-effectiveness, given the high transport costs. China has stepped up its purchases of Canadian oil to record levels. There is no single market the size of the US market to replace exports of steel and aluminum, but the prospects of rising exports to Europe and Asia will help to offset the impact of US tariffs.

The War in Iran, now in its third week, has caused a monumental oil price shock as the Strait of Hormuz is virtually shut down. Other commodity prices have also risen sharply, including natural gas, aluminum, and fertilizer prices. Consumers and businesses are tightening their belts amid uncertainty about the war’s duration.

Housing market activity has been in a long, slow downward trend. Nominal home prices have fallen 20% from their peak in the second quarter of 2022. When accounting for inflation, real home prices are down 30%, providing an enormous opportunity for first-time homebuyers.

In this environment, market-driven interest rates have risen. The 5-year bond yield is once again attempting to break through 3%. The 2-year bond at 2.72% is well above the 2.25% overnight rate, and the Canadian dollar is rising. Lenders have recently increased fixed mortgage rates, which will be more popular if people generally expect rates to rise.

The key to the outlook is the continuation of CUSMA. We will likely suffer several more months of uncertainty before we know the fate of the trade agreement. In the meantime, PM Carney will continue to encourage trade deals in non-US countries.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Housing Activity Fell Again in Early February–Depressed by Record Winter Storm–Before Picking Up in Late February 

General Kim Franz 17 Mar

Today’s release of February housing data by the Canadian Real Estate Association (CREA) showed the housing market slowed further at the start of the month, reflecting the lingering effect of January’s snowstorm. Activity picked up in the second half of the month, a positive harbinger of a spring rebound.

The number of home sales recorded over Canadian MLS® Systems fell 1.3% on a month-over-month basis in February 2026, following a 5.8% decline in January.

“February saw a continuation of the quieter levels of activity recorded in January, although there was some indication things were starting to pick up speed toward the end of the month,” said Shaun Cathcart, CREA’s Senior Economist. “2026 is still ultimately expected to be a story about pent-up first-time buyer demand finally seeing a chance to enter the market. They’ve had to wait a long time for mortgage rates to find a bottom, but some will no doubt continue to hold off for a bottom in prices in some Ontario and British Columbia markets.”
New Listings

New listings fell back by 3.9% on a month-over-month basis in February 2026, erasing the jump recorded in January.

With new supply down by more than sales in February, the national sales-to-new listings ratio tightened to 47.6% compared to 46.4% in January. The long-term average for the national sales-to-new listings ratio is 54.8%, with readings roughly between 45% and 65% generally consistent with balanced housing market conditions.

“Housing market activity in February remained slow, particularly in the stretch of Ontario between Windsor and Toronto,” said Valérie Paquin, CREA Chair. “That said, the main event never really gets going until around April, so there’s still time to get ready to buy or sell this year.”

There were 151,850 properties listed for sale across all Canadian MLS® Systems at the end of February 2026, up 3.7% from a year earlier but 12.3% below the long-term average for that time of year.

There were five months of inventory on a national basis at the end of February 2026, unchanged from January and right in line with the long-term average for the measure. However, the national average masks wide regional differences, with no province currently at that level and only a handful of local markets close to it. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.
Home Prices

The National Composite MLS® Home Price Index (HPI) edged down 0.6% on a month-over-month basis in February, not a small decline but smaller than in January.

The non-seasonally adjusted National Composite MLS® HPI was down 4.8% compared to February 2025.
Bottom Line

The chart below shows that, just as Canada had a record housing rally during the pandemic, it is leading the housing correction. Canadian home prices are down 18% from their peak in the first quarter of 2022, when the Bank of Canada took the overnight rate down to a mere 25 bps. Currently, the policy rate is 2.25%, down from 5.0% at the peak of the tightening cycle. Back then, ultralow interest rates drove home prices to surge, particularly in smaller cities where remote workers fled to take advantage of a lower cost of living.

There is considerable pent-up demand among potential first-time buyers who will likely dip their toes in the market once winter passes. This year, we also see a record volume of refis and renewals, which will increase monthly mortgage payments and dampen household purchasing power. Affordability remains a challenge for first-time buyers, but mortgage rates and prices are considerably lower than a year ago. A reawakening of housing activity is likely as the spring market approaches, even with the war in Iran.

To be sure, the recent oil price shock has boosted market-driven interest rates as inflation fear mounts. Yesterday’s release of the CPI data shows that Canada’s inflation rate fell sharply before the war began. How much further inflation might rise will depend on the length of the war and the subsequent time it will take to reopen the Strait of Hormuz.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Inflation Falls More Than Expected to 1.8% in February

General Kim Franz 16 Mar

Canadian Inflation Falls More Than Expected to 1.8% in February
Canada’s inflation rate slowed by more than expected last month, before the oil shock of the Iran war. The yearly inflation rate fell to 1.8% in February from 2.3% in January, Statistics Canada reported on Monday.

Justin Trudeau introduced a temporary GST/HST break on a range of goods in January 2025, which expired in mid-Feb 2025. This raised the price level in February 2025, reducing inflation in today’s CPI reading. While the tax holiday initially drove annual headline inflation higher due to base effects, it’s now reversing and causing a deceleration that will likely be reflected in the March inflation data as well. This is very good news for the markets, particularly if the war with Iran comes to a relatively short conclusion.
Core inflation measures also eased by more than expected in February. The consumer price index excluding food and energy rose 2%, while the central bank’s trimmed and median measures of inflation both fell to 2.3%.

Shelter prices continued to decelerate last month, and were up just 1.5% from a year ago, the slowest pace in five years amid weak housing resales and smaller rent price increases.
Prices for food — a major sore spot for Canadian consumers — also rose at a slower rate. Yearly inflation for food purchased from stores was 4.1% in February, down from 4.8% the previous month. The deceleration was led by weaker price growth for frozen or fresh beef.
Still, grocery prices are up a cumulative 30.1% over the past five years.

Meanwhile, a more modest year-over-year deceleration in gasoline prices last month helped moderate the slowdown in headline inflation, with prices at the pump down 14.2% from 16.7% in January.

Gasoline prices were up 3.6% on a monthly basis, largely driven by higher oil prices ahead of the Middle East conflict and supply disruptions in some producer countries, Statcan said. Higher oil prices from the conflict in Iran are likely to show up in next month’s CPI data.
Bottom Line

It is very good news that the inflation backdrop softened last month, before the onslaught of the Iran war and the oil price shock. Some of the weaker base effects will be evident in the March CPI data as well, mitigating the impact of soaring energy and commodity prices on next month’s headline inflation number.

The Bank of Canada and the U.S. Federal Reserve will remain on the sidelines on Wednesday as a relatively quick end to the Iran war would keep a lid on inflation. President Trump has asked NATO countries to send warships to the Middle East to help open the Strait of Hormuz. The sooner the war ends, the sooner the oil price shock will dissipate. Given the uncertainty, the central banks will do best to keep their powder dry this time around, particularly given that labour markets in both countries have weakened substantially.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Jobs Report Was Much Weaker Than Expected In February 

General Kim Franz 13 Mar

The Canadian Jobs Report Was Much Weaker Than Expected In February 
Today’s Labour Force Survey showed considerable weakness last month, even before the Gulf War took hold of the global economy. Employment fell by 83,400 jobs after edging down in January (-25,000; -0.1%). This is the largest decline in employment in more than four years. On a year-over-year basis, employment was little changed in February 2026.

In February, the employment rate—the proportion of the population aged 15 and older who are employed—fell by 0.2 percentage points to 60.6%, marking the second consecutive monthly decline. The employment rate in February was just above the recent low of 60.5% observed in August 2025 and was down 0.4 percentage points year over year.

The number of people working full-time declined by 108,000 (-0.6%), offsetting growth recorded over the previous two months. At the same time, there was little variation in the number of people working part-time in February.

The number of employees in the private sector fell by 73,000 (-0.5%) in February, the second consecutive monthly decline. These declines offset gains observed in October and November 2025. Compared with 12 months earlier, the number of private sector employees was virtually unchanged in February.

The number of public sector employees and the number of self-employed workers were both little changed last month.
The unemployment rate rose 0.2 percentage points to 6.7% in February, as employment fell and more people searched for work. The unemployment rate was virtually unchanged from 12 months earlier (6.6%) and remained below the recent high of 7.1% reached in August and September 2025.

The participation rate—the proportion of the population aged 15 and older who were employed or looking for work—fell by 0.1 percentage points to 64.9% in February. It was down 0.4 percentage points year over year.

The employment decline in February was spread across services-producing industries (-56,000; -0.3%) and goods-producing industries (-28,000; -0.7%).

In services-producing industries, the largest decline was in wholesale and retail trade (-18,000; -0.6%). Employment in this industry has trended down since October 2025, with a cumulative decline of 52,000 (-1.7%) over this period.

In goods-producing industries, employment edged down in February in construction (-12,000; -0.7%) and manufacturing (-9,200; -0.5%). On a year-over-year basis, employment was little changed in construction, while it was down by 52,000 (-2.8%) in manufacturing.
Bottom Line

Today’s employment report is stale news as the war in Iran, which began on February 28 with coordinated strikes by the US and Israel targeting Iranian nuclear and military infrastructure, has had profound effects on the global economy. Owing to the closure of the Straits of Hormuz, oil flows are down by roughly 20 million barrels. Even with the largest release ever from strategic petroleum reserves, oil prices remain near $100 a barrel, a dramatic uptick from just two weeks ago.

Ordinarily, such economic weakness would trigger central bank easing, but the surge in energy prices will add to inflation, at least temporarily. Labour markets remain soft as the economy bears the weight of US tariffs and an upcoming CUSMA review looms over business. This is likely to complicate the Bank of Canada’s future monetary policy path. While the Bank might otherwise consider a rate cut to return growth and labour markets to healthier levels, the surge in oil prices is inflationary.

The Bank of Canada’s sole mandate is to return inflation to its 2% target, while the Fed’s mandate is to control inflation while maximizing noninflationary growth. The energy shock, if persistent, could justify a rate hike.

The BoC meets again next Wednesday, March 18, and markets and economists expect officials to hold the policy rate steady at 2.25%. The February CPI report for Canada will be released on Monday, but the February data are now ancient history, given the war. Meanwhile, hourly wages for full-time permanent employees rose 4.2% from a year ago, compared with 3.3% in January. Economists surveyed were expecting a 3.2% increase.

Much depends upon how long the war will last. According to today’s Wall St. Journal, oil markets are “waking up to a new reality: Disruption to the Gulf’s prodigious energy supplies isn’t ending anytime soon.” Many analysts aver that crude could hit new multiyear highs if the conflict drags on.

“Goldman Sachs this week raised its oil price forecasts, citing longer-than-expected disruption. Brent crude could average $145 in March and April in a more extreme scenario, it said. The bank now expects disruption to flows through the strait to last 21 days, up from its previous forecast of 10 days. Macquarie Group is now predicting that crude prices could top $150 if the strait remains closed for a few weeks. Others say oil prices could go even higher.”

“One reason for the changing outlook is a surge in attacks on tankers near the strait. Over the past 24 hours, at least seven vessels were hit in waters off the coast of Dubai and Iraq. One of the ships, a foreign tanker carrying Iraqi fuel oil, was ablaze in Iraqi waters. US officials said that Iran has also started to litter the strait with sea mines that could give the country outsized power to wreak havoc with the global economy.

“The war in the Middle East is creating the largest supply disruption in the history of the global oil market,” the International Energy Agency said Thursday as it slashed its forecast for oil-supply growth this year.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The Canadian Economy Shrinks by 0.6% in Q4, Owing to a Decline in Business Inventories

General Kim Franz 2 Mar

The Canadian Economy Shrinks by 0.6% in Q4, Owing to a Decline in Business Inventories
Statistics Canada reported this morning that the Canadian economy contracted by 0.6% at a seasonally adjusted annual rate, a significant reversal from the 2.4% expansion posted in Q3. The weaker growth rate reflected a steep decline in business inventories, which was partially offset by increases in household spending, exports, and government capital spending.

Economists surveyed by Bloomberg were expecting a 0.2% annualized decline over the last three months of 2025, while the Bank of Canada projected flat growth.

As US tariffs weighed on Canadian exports for much of the year, real GDP increased by 1.7% in 2025, marking the slowest annual growth since the economy contracted in 2020 owing to the COVID pandemic. Lower exports, particularly to the United States, were the main contributor to the slower rise in GDP in 2025.

A preliminary estimate suggests real GDP remained unchanged in January, after increasing by 0.2% in December, slightly stronger than economists’ estimate of 0.1%.

Exports rose 1.5% in the fourth quarter, after increasing 0.9% in the third quarter. The growth in the fourth quarter was led by higher exports of unwrought gold and of unwrought aluminum and aluminum alloys. Despite the increases in the latter half of the year, exports fell 1.7% in 2025, as shipments to the United States did not fully recover following the drop in the second quarter.

Imports edged up 0.3% in the fourth quarter, as higher imports of computers, clothing and footwear, and metal ores were largely offset by lower imports of pharmaceutical and medicinal products. For the year, imports were down 0.4% in 2025, driven by the 2.9% decline in the third quarter.
The better-than-expected Q3 gain will not be sustained in Q4, as Statistics Canada’s advance estimate for October showed industrial gross domestic product fell at a -0.3% monthly pace.

The current overnight policy rate of 2.25% remains stimulative, but until the likely outcome of trade negotiations with the US is resolved, Canada’s economy will be on shaky ground. It is unclear whether the Canada-US-Mexico free trade agreement will be extended beyond this year. If not, Canada will be in for a significant trade policy redo as it seeks replacement markets for its exports.

Household spending rose 0.4% in the fourth quarter after declining 0.2% in the third quarter. Higher expenditures on rent and financial services in the fourth quarter were partially offset by lower spending on new passenger vehicles and alcoholic beverages, as overall expenditures on goods declined for a second consecutive quarter.

On an annual basis, household final consumption expenditure was up 2.3% in 2025, keeping pace with the 2.2% growth in each of the previous two years. The rise in 2025 was led by increased household spending on financial services and rent.

Total capital investment rose 0.8% in the fourth quarter, driven by increased government investment in weapons systems. In contrast, business capital investment edged down 0.1% in the fourth quarter, as both residential and non-residential investment decreased. These declines were moderated by increased business investment in machinery and equipment, primarily computers (+19.6%) and intellectual property products, namely software (+0.7%).

Annually, total capital investment increased 1.4% in 2025, led by higher government investment in weapons systems (+45.9%) and engineering structures (+6.7%). Business investment rose 0.3% in 2025, as higher residential construction (+1.0%) and non-residential construction (+1.6%) were largely offset by weaker investment in machinery and equipment (-3.5%). The year 2025 was the third consecutive year in which government capital investment contributed more to GDP growth than business capital expenditures.

Business residential investment declined in the fourth quarter, led by decreased ownership transfer costs (-2.4%), a measure of resale market activity, and lower renovations (-1.3%). New construction (-0.5%) also declined in the fourth quarter due to lower work put in place for single- and apartment units.

Higher business residential investment in 2025 represented the first annual increase since 2021, as increased new construction (+1.0%) and renovations (+2.7%) more than offset the decline in ownership transfer costs (-3.4%).

Bottom Line

While weaker-than-expected Q4 GDP figures might normally trigger an easing move by the Bank of Canada, the Governing Council has made it very clear that it remains concerned about inflation. Tariff uncertainty is especially high now that the Supreme Court has found the Trump administration misused the International Emergency Economic Powers Act (IEEPA) to impose sweeping, open-ended tariffs — striking down the legal foundation for a central pillar of the administration’s trade strategy.

The decision removes the fastest way to impose broad country-level duties, but it does not end the tariff debate. Other statutory authorities remain in play, and businesses and trading partners are left to assess what comes next.

The ruling also lands amid sustained political pressure around affordability, which may shape how aggressively trade tools are redeployed. Even if tariff rates decline, businesses must now assess whether alternative authorities will be used to reimpose them. For the real economy, restoring stability may matter as much as reducing tariffs themselves.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres