Canada's Inflation Was Favorable Before The Iran War Came Along, Says TD

08:32 AM EDT, 03/30/2026 (MT Newswires) -- The truth is that nobody knows how the Iran conflict will evolve, said TD, adding that its working assumption is a short-lived conflict, but the bank remains ready to adjust.

Even if the war proves short-lived, TD still thinks it will shave a bit from 2026 real gross domestic product growth as households face higher inflation and businesses see a bump in their input costs.

From an inflation perspective, a bit of good news is that it was relatively well-behaved heading into the war, stated the bank. Indeed, headline inflation was under the Bank of Canada's 2% target in February, while shorter-term core inflation metrics were also running cool.

Notably, the BoC is going through its five-yearly review of its monetary policy framework. In a speech this week, Senior Deputy Governor Carolyn Rogers reaffirmed the BoC's commitment to the 2% target, but noted it's taking a hard look at how shelter inflation is measured.

A good part of the reason that inflation metrics have eased is that economic growth has been soft. TD will see how Canada's economy performed to begin 2026 with Tuesday's release of the monthly GDP report for January. Statistics Canada guided that this number will be flat and if that is indeed the case, it means the economy began the year on a soft footing.

Last week's Survey of Employment, Payrolls and Hours (SEPH) did show an encouraging 0.2% monthly gain in employment in January. Although on the downside, hiring was flat year-on-year and wage growth was modest.

For 2026 overall, soft real GDP growth of 1.1% is probable for Canada, added the bank. United States tariffs, economic uncertainty and inflation pressures should slow growth. In contrast, government spending is likely to support the economy.

In this vein, the Manitoba and Ontario governments released their budgets last week. Both fiscal blueprints featured growth-enhancing measures, including a PST cut on groceries in Manitoba. The Ontario government pledged enhanced capital cost depreciation allowances and an extended HST cut on new homes to all buyers. Ontario's HST measure should boost housing at a time when it is needed. Capital spending remained an important focus -- another growth-supportive move.

Like TD, the BoC expects government spending to make a meaningful contribution to growth this year, and recent budgets did little to alter that view. With the economy weak and inflation starting from a favorable place, Canadian policymakers have scope to remain less hawkish than their peers.

For now, TD predicts Canada's central bank to stay on hold, with the path ahead hinging on developments in the Middle East.

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