The Bank of Canada opted to maintain its key interest rate at 2.25% on Wednesday, citing the potential global inflationary impact of heightened oil and gas prices stemming from the Middle East conflict. However, the central bank emphasized the need for further assessment of how the conflict may affect the Canadian economy.
Anticipating modest economic growth amid U.S. trade policy uncertainties, the bank acknowledged that near-term growth might fall short of initial projections for the year. Bank of Canada governor Tiff Macklem highlighted the increased volatility faced by Canada due to the war in Iran, which has introduced a new level of uncertainty.
In light of the surge in oil prices driven by the conflict, Macklem noted that inflation in Canada, which has hovered near the two percent target for over a year, is likely to rise in the short term. This poses a dilemma for the bank as raising interest rates to curb inflation could further weaken the economy, while cutting rates to stimulate growth might push inflation above the target.
Economist Avery Shenfeld from CIBC Capital Markets observed that the bank did not signal any debate on whether to adjust rates presently. The bank’s stance reflects the view that the duration of the energy price shock remains uncertain and will significantly impact its implications.
Regarding the war’s influence on the Canadian economy, the bank emphasized that it is premature to gauge its effects and pledged to monitor both the conflict and the repercussions of U.S. trade policies. The Bank of Canada is scheduled to announce its next interest rate decision and release the Monetary Policy Report on April 29.