The Bank of Canada decided to maintain its key interest rate at 2.25 per cent on Wednesday as anticipated, emphasizing that any adjustments in the rate would likely be minor if the economy progresses according to the bank’s forecasts.
Governor Tiff Macklem indicated that the current key rate is likely appropriate if the economy aligns with the central bank’s projections, although he did not rule out potential modifications based on evolving risks.
In light of the heightened uncertainty, the bank emphasized the need for flexibility in monetary policy, acknowledging the elevated risks associated with various potential outcomes.
The bank is closely monitoring the effects of the conflict in Iran, which has significantly driven up energy prices, as well as ongoing trade policy uncertainties. Despite the surge in oil prices, the bank is currently overlooking its impact on inflation, but prolonged high oil prices could necessitate rate hikes.
While inflation is projected to rise to around three per cent in April from 2.4 per cent in March, averaging 2.3 per cent for the year, the bank anticipates a return to its two per cent target by early next year. Additionally, the bank revised its growth forecast for 2026 to 1.2 per cent, up from the previous estimate of 1.1 per cent.
Macklem noted that current inflation concerns are primarily confined to energy prices, with long-term inflation expectations remaining stable.
Although near-term inflation expectations have increased due to elevated energy and food prices, the bank emphasized that long-term inflation expectations are well anchored. Macklem expressed concerns about potential shifts in inflation expectations since the onset of the COVID-19 pandemic.
The bank assumed that U.S. tariffs would remain unchanged, with oil prices projected to decrease to $75 US per barrel by mid-2027. However, continued escalation in oil prices could lead to generalized inflation, potentially necessitating consecutive rate hikes.
In addition to oil prices, the bank highlighted the impact of the ongoing trade war, which could further complicate the economic outlook. The bank may consider reducing the policy rate to support the economy in the event of heightened trade restrictions following the upcoming CUSMA review.
The Bank of Canada’s acknowledgment of the dual impact of oil prices and trade tensions suggests a cautious approach to monetary policy, according to CIBC economist Avery Shenfeld. The next monetary policy decision is scheduled for June 10, with expectations of no rate change, although a 25-basis-point hike in October is being priced into the money markets.
