The Bank of Canada opted to maintain its key interest rate at 2.25 per cent on Wednesday, aligning with expectations. Governor Tiff Macklem indicated that any adjustments to the rate would likely be minimal if the economy progresses as anticipated. Macklem acknowledged the potential for future modifications based on evolving risks but emphasized that slight changes are foreseeable if the economy aligns with the central bank’s projections. The bank emphasized its vigilance regarding the repercussions of the conflict in Iran, which has led to a surge in energy prices, as well as the uncertainty surrounding trade policies. Despite the surge in oil prices, the bank is currently overlooking its impact on inflation, although prolonged high oil prices could prompt rate hikes.
Inflation is projected to rise to approximately three per cent in April, up from 2.4 per cent in March, with an average of around 2.3 per cent for the year, expected to return to the bank’s two per cent target by early next year. Additionally, the bank revised its 2026 growth forecast to 1.2 per cent from the earlier prediction of 1.1 per cent in January. Macklem highlighted that current inflation primarily stems from energy costs, with long-term inflation expectations remaining stable.
While short-term inflation expectations have surged due to higher energy and food prices, Macklem noted that long-term expectations are secure. He expressed concerns about the possibility of inflation expectations becoming less anchored compared to pre-pandemic levels, citing public discontent during the pandemic when inflation spiked to 8.1 per cent. The bank assumed that U.S. tariffs would remain unchanged, with the projected price of oil dropping to $75 per barrel by mid-2027.
Macklem warned that continuous increases in oil prices, particularly if they persist at elevated levels, could lead to sustained inflation, necessitating consecutive rate hikes. The bank also underscored the impact of the ongoing trade war, which adds complexity to the economic landscape. If the United States imposes stricter trade restrictions following the upcoming CUSMA review, Macklem stated that further rate cuts might be necessary to support the economy. Senior Deputy Governor Carolyn Rogers highlighted the immediate impact of the oil crisis and the enduring implications of trade tensions.
Economist Avery Shenfeld from CIBC interpreted the bank’s acknowledgment of these factors as a signal of a prolonged steady stance. Shenfeld suggested that the bank’s mention of potential rate cuts due to trade restrictions or hikes stemming from energy price-induced inflation hints at their inclination to maintain the status quo for an extended period. The next monetary policy decision is scheduled for June 10, with money markets not anticipating a rate adjustment but factoring in a 25-basis-point increase in October.