International economy
Governing Council began its deliberations by discussing recent developments in the global economy and the implications for the outlook. Global growth had continued to track at about 3%, as had been expected in the January Monetary Policy Report. However, the start of the war in Iran had increased uncertainty around the global outlook. Energy prices had risen sharply, which will boost inflation around the world. Members agreed that the impact of the conflict on global growth and inflation will depend on the duration of the conflict and the extent to which it spreads across the Middle East.
Members also noted a new development in global trade—the US Supreme Court’s ruling that the tariffs imposed under the International Emergency Economic Powers Act were illegal and the US administration’s plans to replace tariffs through other means. They agreed that this had no direct implications for sectoral tariffs on Canadian exports and that trade-related risks to Canada remained unchanged since January.
In the United States, indicators of economic activity had moderated since January but remained solid. The effects of the US government shutdown on consumption and government spending were temporary and led to slower growth in the fourth quarter of 2025. Economic activity was expected to pick up in the first quarter to average about 2% over the two quarters. The US outlook for 2026 remained in line with the projection in the January Report, driven by consumption and strong investment in artificial intelligence (AI). Investment outside the AI sector was subdued, and exports remained weak. The labour market had softened slightly, with some indicators suggesting there could be more slowing. US inflation had risen in recent months, driven partly by previously announced tariffs that had passed through to prices of core goods. US inflation was expected to pick up in the second quarter as the conflict in the Middle East was pushing up energy prices.
In the euro area, recent data had been mixed and did not alter the overall outlook relative to the January Report. Domestic demand and steady labour markets had continued to support growth. Members noted that the inflation outlook in the euro area was vulnerable to the energy price shock, particularly given the euro area’s reliance on liquefied natural gas imports.
Growth in China had continued to be driven by strong exports, partially offset by weak domestic demand.
Since the war in Iran began, global financial conditions had tightened from previously accommodative levels. Global bond yields were higher, stock markets were lower, and credit spreads were wider. Members acknowledged that the tightening was modest and that financial markets had been relatively orderly despite a sharp increase in volatility.
Members discussed the disruptions to oil and gas supplies caused by the Middle East conflict, the sharp rise in global energy prices that followed and the probable impact on the global economy. They noted that the impact on inflation would vary across jurisdictions—the effects would be more pronounced in energy-importing economies, such as the euro area and much of Asia, than in net energy exporters. Members also discussed the risk that disruptions to shipping through the Strait of Hormuz could raise the costs of other commodities, such as fertilizer. Risks to global growth and inflation would depend on the duration of these disruptions and the extent of disruptions to regional production.
Members discussed whether the risks of second-round inflation effects from the energy price shock might be more limited today relative to some historic episodes. The global economy now uses less oil per unit of output, limiting the pass-through of the oil price increase to prices of non-energy goods and services. And the risks of wage-price spirals and de-anchoring of inflation expectations are likely lower today because of structural changes in the labour market and years of experience with inflation-targeting monetary policy frameworks. But members acknowledged that the public’s perception of inflation remained high after the 2022 spike and that gasoline prices have historically had a large impact on households’ assessment of inflation.
The Canadian dollar had remained relatively stable against the US dollar, at just above 73 cents. But it had strengthened together with the US dollar against most other currencies since the start of the Middle East conflict.
