Economists are revising their economic forecasts for Canada, predicting higher inflation and increased unemployment as the ongoing war in Iran drives a sharp spike in global oil prices, exacerbating worldwide instability. According to a recent Bloomberg survey, analysts now anticipate the consumer price index to rise at an annual pace of 2.4% this year, up from 2.2% in the previous month's assessment.
Economic Indicators Show Worsening Trends
The survey, conducted between March 20 and 25 with input from 33 economists, reveals that unemployment is expected to average 6.7% in 2026, compared to an earlier projection of 6.5%. Concurrently, economic growth is forecast to slow to 1.1%, down from 1.2%, while investment is projected to increase by only 0.8%, a decline from the prior estimate of 1.3%.
Stagflation Risks Loom Large
The combination of accelerating inflation, elevated unemployment, and weak growth points to mounting stagflationary risks for the Canadian economy. Last week, Bank of Canada Governor Tiff Macklem described this scenario as a dilemma, noting that both raising and lowering interest rates carry significant dangers in such an environment.
In the survey, the median expectation is for the central bank to maintain borrowing costs steady throughout 2026, with potential rate hikes not commencing until the second quarter of 2027. This outlook increasingly diverges from market expectations, where traders in overnight swaps foresee at least 50 basis points of hikes by the Bank of Canada's October meeting.
Central Bank's Cautious Stance
Officials have held the policy rate at 2.25% since October of last year, including at their most recent decision. Prior to the oil price surge, the bank had been primarily focused on the structural damage posed by the U.S. tariff dispute, asserting that rates were at an appropriate level to support economic transition while controlling inflationary pressures.
On Thursday, Senior Deputy Governor Carolyn Rogers emphasized the need to guard against higher petroleum costs spreading to other goods and services and becoming ongoing, persistent inflation. Meanwhile, Governor Macklem has indicated he would look beyond the near-term spike in oil prices, highlighting the downside risks facing the economy. In a dovish communication, Macklem stated that the central bank would be talking about lower rates if growth continued to deteriorate, absent the upside risk from elevated energy costs.
The Bank of Canada is scheduled to next set interest rates on April 29, as economists and markets closely monitor the evolving economic landscape shaped by geopolitical tensions and energy market volatility.
