Amidst geopolitical conflict, North American central banks hold interest rates steady

Richard Schmidt

March 19, 2026

Key takeaways

Both North American central banks decided to leave policy interest rates unchanged in March.
Conflict in the Middle East has increased uncertainty, energy prices have risen sharply.
We maintain our overall positive view on equities relative to fixed income and cash.

Unsurprisingly, both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) decided to leave policy interest rates unchanged this month amidst the breakout of conflict in the Middle East. The BoC benchmark rate remains at 2.25% and the target for the federal funds rate remains at 3.5-to-3.75%. The announcements were widely expected given the sharp increase in energy prices, increased volatility in financial markets, and intensified risks to the global economy.

Canadian economic growth will likely be weaker than previously expected

The BoC stated that “financial conditions have tightened from accommodative levels.” The Canadian economy contracted 0.6% in the fourth quarter of 2025 which is weaker than what was projected in the January Monetary Policy Report (MPR). The Bank expects “the Canadian economy to grow modestly as it adjusts to U.S. tariffs and trade policy uncertainty, but recent data suggest that near-term economic growth will be weaker than anticipated in January.” Additionally, the labour market appears worse for wear, end of 2025 gains were forfeited in the early part of 2026 as unemployment rose to 6.7% last month.

Consumer Price Index inflation eased from 2.3% in January to 1.8% in February, however, the outbreak of war in the Middle East will likely push inflation higher in the near term via elevated prices for energy and other commodities like fertilizer. With the scale and duration of the conflict unknown, the impact to the global economy also remains highly uncertain.

Understandably, the BoC did not provide any indication of future interest rate cuts or hikes, preferring to stay neutral saying it would be “ready to respond as needed.” At this time, we believe the BoC is done cutting rates in the near term.

Wait and see for the Fed

Summarized by the Fed, “Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has been little changed in recent months. Inflation remains somewhat elevated… Uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain.”

In the Fed’s latest Summary of Economic Projections (SEP), growth and labour forecasts are little changed relative to the December edition. Inflation expectations are marginally higher, which implies that the Fed expects the spike in energy prices to pass fairly quickly with limited impact on inflation overall. Expectations for interest rates also remain unchanged, with the Fed still projecting one 0.25% cut for 2026 and further cuts in 2027.

There continues to be dissent, albeit diminishing, within the Federal Open Market Committee with one voting member preferring to cut rates by 0.25% this month. Noteworthy was incoming Fed Governor Kevin Warsh aligning with the majority for leaving rates unchanged. While we still believe two 0.25% cuts remains likely for 2026, this expectation is heavily contingent on how the conflict in the Middle East and how energy prices develop going forward.

Sticking to our process

Unfortunately, geopolitical tension, war and conflict are not unfamiliar to us as portfolio managers. Looking back, to the Persian Gulf War, the invasion of Iraq and various other regional conflicts, financial markets have navigated and weathered similar scenarios many times before. Situations like this really reinforce the value of professional portfolio management and diversification across multiple asset classes, regions, styles and sectors. We have a well-established playbook on how we monitor, assess and respond. We are watching the conflict itself, policy responses, energy markets, how companies are reacting and more.

The strategic asset allocation of our clients’ portfolios remains unchanged—which is intentional. These portfolios are built around long-term goals, long-term time horizons and long-term capital market expectations, and that remains unchanged.

Where we may adjust over time is in our tactical positioning, which focuses on the next 12-to-18 months as risks and opportunities become clearer. At this time, we continue to be tactically overweight equities relative to fixed income and cash in our portfolios with a tactical asset allocation overlay.

Both the BoC and Fed are scheduled to announce their next interest rate decisions on April 29th. The BoC’s announcement will be accompanied by the latest MPR.

Richard Schmidt

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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