It’s been a big policy week for Canada, with both the Bank of Canada and the federal government providing updates. We dig into both today.

Seeing through the spike…for now

“Governing Council is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed.”

This line from today’s rate decision pretty much sums up the story from the widely expected decision by the Bank of Canada to stay on hold at 2.25%.

In other words, the Bank will not react to a short-term spike in inflation above its target. But if these pressures persist, they will act. So the burning question is this: will the current price spike be short-term or long-term?

The Bank was hoping for a quieter year. Just as they seemed close to declaring victory by hitting their inflation target, the war in Iran broke out. With the Strait of Hormuz effectively blocked, energy prices have soared. The March inflation reading of 2.4% is just the start, and we see inflation moving higher in the coming months—a frustration for Canadians still fatigued from the last bout of inflation.

Today, the Bank said they now see inflation averaging 2.3% this year, up from a forecast of 2.0% in January, with the temporary suspension of the federal gasoline tax providing a partial offset to higher energy prices. Inflation peaks at 2.6% in Q2 2026 according to the Bank.

If this forecast seems too low to you, keep in mind that the Bank’s inflation outlook is highly contingent on oil prices falling (they see WTI falling to US$75 per barrel by mid-2027).

As for the next move, the Bank is in a tricky spot; you could almost feel the tension reading the document and in the press remarks. In a tug of war of two competing forces, they will have to find a balance.

1) The Canadian economy remains soft, with a mild GDP contraction in the fourth quarter, and job losses in the first quarter of this year. Risks loom with the upcoming CUSMA review, and Governor Tiff Macklem said in his opening statement that the Bank could cut if the U.S. imposes new trade restrictions to shore up growth.

2) The energy price spike is raising inflation, and there is a risk that the longer this persists it will feed through the broader basket of goods we purchase every day, including food, household goods and clothing. As Macklem also noted in the opening statement, such a "generalized" inflation scenario could lead to rate hikes.

Bottom line: The Bank is adopting a “wait-and-see” approach. If the futures market is correct, and oil prices decline in the second half of 2026, we think the Bank will remain on the sidelines this year. In our base case, we see them moving up to the midpoint of neutral (2.75%) by the end of next year.

It wasn’t supposed to be this way. Prior to the war, headline inflation tucked below 2%, and even the more stubborn core readings (which gauge underlying inflation pressures) were cooperating.

Turning to the Bank’s fresh slate of growth forecasts, not much has changed. Real GDP is expected to grow 1.2% this year (up from 1.1% in January, and close to our 1.3% call) on the back of consumer and government spending. We flag this as a structural concern, given how much of Canada’s growth has come from these two channels over the past decade.

As for tariffs, the Bank assumes the status quo as we head into the CUSMA review: sector-specific tariffs and the general 10% rate with CUSMA exemptions apply. That’s what we assume as well. Ongoing trade uncertainty continues to put a damper on activity.

The update highlights that, as a net oil exporter, Canada is somewhat cushioned: “Since Canada is a large net exporter of oil, higher oil prices increase national income even as consumers are squeezed by higher gasoline prices.”

But as we’ve noted, the economic lift is less than in the past due to continued caution among oil and gas producers on their capital spending. Or, as the Bank says: “Investment and employment in the oil sector in Canada are assumed to be less responsive to higher oil prices than in the past, reflecting greater emphasis on dividend payments in the energy sector and improved capital efficiency.” What the Bank doesn’t say is that the investment trajectory could change with long-term investments in pipeline capacity and more policy certainty, as we’ve recently explored.  

Federal deficit forecast trimmed

Let’s turn to fiscal policy.

Leading into yesterday’s fiscal update, we were told to expect “good news” by PM Mark Carney and indeed the deficit came in smaller than projected in the fall budget. The federal government will use some of the unexpected windfall on new spending and tax measures.

What happened? The economy performed better than expected in the face of tariffs, and now higher oil prices are providing a revenue lift to the federal treasury.  

The update serves as a reminder that it’s not just energy provinces like Alberta that receive a revenue boost from higher oil prices. The federal government also gets more revenue, primarily via corporate taxes. The update notes that a persistent 10% oil price increase translates into about $3 billion in additional federal revenue.

Side note: the new revenue projections may understate the impact, as a conservative oil price forecast of US$73/bbl is used for 2026 (presumably reflecting the lagged timing of when the private sector survey was taken).

Good news is relative. The deficit is still large and there is no path to balance. And while the economy is better than we thought on ‘Liberation Day’ (roughly a year ago), it’s hardly roaring.  Unemployment sits at an elevated 6.7%, with particularly high rates among youth. More importantly, the structural issues around languishing business investment, exports and productivity remain largely unresolved, as we’ve repeatedly discussed on these pages.

The right target, now comes the execution

The Carney government seems to agree with our view that business investment is a big part of the problem. It has a goal to enable $1 trillion in investment over the next five years.

The signature policy is to accelerate major projects through the Major Projects Office (MPO). And now, in this update, the government has paired that with a ‘Sovereign Wealth Fund’ (SWF) it calls the Canada Strong Fund. It’s not a SWF in the classic sense, which typically involves saving resource revenues or surpluses. Instead, it’s borrowing $25 billion to fund the initial contribution over three years, then creating a retail investor product to buy equity shares with the principal backed by the government. Only the broad parameters of the Fund were spelled out. There are some outstanding questions like how the principal will be backed, how funds can be withdrawn (liquidity), and how returns will be calculated.

The policies have been set, now we’ll need to see if it works. Shovels in the ground on major projects could signal to investors that Canada can build big things, which may shift sentiment in the country’s favour. The risk is that the government-led approach may not catalyze private investment as much as expected, with taxpayers footing the bill. While the MPO could get the ball rolling, a broader effort in our view will be required to improve the regulatory process for all projects.

It’s early days, but so far the needle hasn’t moved much. The government points to higher foreign direct investment into Canada. However, business investment was flat last year, and remains well below 2014 levels (see the chart below).  

Looking closer to Alberta, nothing new was announced on the MOU between Alberta and Canada other than the fact that they continue to work towards implementation. Progress has been made on some elements, but the original April 1, 2026 deadline on carbon pricing and Pathways was not met.

The fiscal update addresses a major concern we’ve had: who is going to “build baby build”?  The reality is that there is already a shortage of tradespeople today and this is before the promised ramp-up in investment.

The federal government announced nearly $6 billion over five years to recruit, train, and hire up to 100,000 new Red Seal tradespeople by 2030-31, including grants to help offset the cost of training and hiring new apprentices. Financial support helps, but will it be enough to lure youth into the trades? Further, will it be enough to encourage retention given that many people who start these programs do not finish?

Bottom line: The right target is set: more investment is needed, and more workers are required to build these projects. But now we wait for execution and the needle to move on the chart above.

Answer to the previous trivia question: Approximately 13% of Indigenous-owned firms in Alberta operate in retail, as per the recent report From Readiness to Reach: Indigenous Trade, Partnership and Economic Growth in Alberta.

Today’s trivia question: Who was the Minister of Finance who oversaw the first federal budget in 1867?