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Global equity markets finished lower over the week ended March 20. Sentiment was relatively muted as the conflict in the Middle East continued. Plus, building inflationary pressures raised the possibility that major central banks would raise interest rates. In Canada, the S&P/TSX Composite Index declined, dragged down by the materials sector. U.S. equities also dropped. Yields on 10-year government bonds in Canada and the U.S. increased. The price of gold fell. The price of oil finished slightly higher after a choppy week. The Strait of Hormuz remains effectively closed, and Iran continued to strike key energy complexes in the Persian Gulf. However, several countries, including Canada, pledged to help stabilize the energy market.
Central banks hold interest rates steady amid cloudy outlook
Several critical central banks around the world made interest rate decisions last week, noting the outlook for their economies is clouded in response to geopolitical tensions in the Middle East.
The Bank of Canada (BoC) held its benchmark overnight interest rate steady at 2.25% at its March meeting. The BoC said that the conflict in the Middle East has raised uncertainty for the outlook for the Canadian and global economies. The BoC is prepared to move its policy interest rate in either direction depending on the impact on Canada’s economy and consumer prices.
The U.S. Federal Reserve Board (Fed) also held steady, keeping the target range of its federal funds rate at 3.50%–3.75%. The Fed also noted that the implications of the war on Iran on the U.S. economy are uncertain.
The European Central Bank, Bank of England and Bank of Japan all held their key interest rates steady last week.
Central banks are carefully monitoring how tensions in the Middle East and the resulting hikes in oil prices will impact their respective economies. They are relatively certain that inflationary pressures will climb higher. What impact the conflict in the Middle East has on economic activity, demand and the labour market will play out over the coming weeks.
Canada’s inflation moderates ahead of higher energy prices
Canada’s annual inflation rate softened to 1.8% in February from 2.3% in the previous month, which was also below the 1.9% rate economists had expected.
The price growth for food slowed considerably in February, due in part to higher prices last year at the end of the HST holiday.
The primary measures of annual core inflation – median and trim – slowed in February.
Demand was relatively strong in January. Retail sales rose by 1.1% in January, rebounding from the 0.4% decline in the previous month. Statistics Canada estimated that retail sales rose by another 0.9% in February, suggesting domestic demand was relatively firm at the start of 2026.
The lower levels of inflation in February came ahead of an expected increase as the conflict in the Middle East has pushed up energy prices. The BoC is concerned about rising inflation. Canada’s central bank said it would monitor economic conditions and is prepared to shift monetary policy in either direction depending on the path of Canada’s economy.
U.S. producer prices rise at fastest pace in seven months
Producer prices in the U.S. increased by 0.7% in February, which was more than expected by economists. This was the largest increase since July 2025.
The increase was driven by an almost 50% increase in prices for fresh and dry vegetables. Prices for gasoline, diesel fuel and traveller accommodation services also increased, offsetting a decline in prices for jewelry and soft drinks.
On a year-over-year basis, producer prices climbed higher by 3.4% in February, marking their fastest increase since February 2025.
A separate report showed that industrial output rose by 0.2% in February, which was a considerable slowdown from the 0.7% increase in January. Manufacturing output moderated in February.
The producer price report suggested that, even before rising energy prices in response to the conflict in the Middle East, price pressures are forming across the supply chain. These prices typically translate into higher consumer prices.
Lunar New Year holiday helps boost China’s sales
Over January to February 2026, retail sales in China rose by 2.6% over the same period in 2025, topping economists’ expectations.
Consumer spending activity strengthened over the Lunar New Year holiday. Sales increased for food, clothing and home appliances over the period.
Beijing is trying to boost domestic demand in 2026, including extending fiscal and monetary policy measures to support household spending.
Meanwhile, industrial production rose by 6.3% over the same period, which was well above the 5.3% increase economists had expected. The mining, manufacturing and utilities industries saw a significant increase in output.
Despite the solid results early in 2026, China’s economy remains a relatively softer growth environment. China’s government has taken measures to help support weak areas of the economy, including domestic demand and the property market, but now faces external risks to economic activity from tensions in the Middle East.
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