The Bank of Canada opted to maintain its key interest rate at 2.25 percent on Wednesday, citing the potential global inflationary impact of heightened oil and gas prices due to the Middle East conflict. The bank acknowledged that it is too early to gauge the specific effects of the conflict on the Canadian economy, anticipating modest growth as the country navigates uncertainties in U.S. trade policies. Bank of Canada governor Tiff Macklem emphasized the added volatility stemming from the Iran war, which introduces a new layer of uncertainty for Canada.
While inflation in Canada has hovered around the two percent target for over a year, the surge in oil prices triggered by the conflict is expected to drive up inflation in the short term. Macklem highlighted the dilemma faced by the bank, noting that adjusting interest rates to curb inflation could further weaken the economy, while cutting rates to stimulate growth might push inflation above the bank’s target.
Economist Avery Shenfeld of CIBC Capital Markets observed that the central bank did not signal any debate on whether to raise or lower rates presently. The bank’s stance aligns with the view that the duration of the energy price shock will significantly impact its implications, a factor currently unknowable.
The decision follows a weak labor force survey showing a loss of 84,000 jobs in February, juxtaposed with a recent uptick in global energy prices driven by disruptions in the Strait of Hormuz. The Bank of Canada underscored that it remains premature to assess the Middle East conflict’s effect on Canadian economic growth, pledging to monitor both the war developments and the influence of U.S. trade policy on the economy.
Regarding the impact of rising energy prices on Canada’s economy, Macklem mentioned the multifaceted effects of such shocks, contingent on the conflict’s duration. While higher oil prices may boost income from oil exports, they could strain households and businesses by diverting spending towards energy expenses at the expense of other goods and services.
Macklem and senior deputy governor Carolyn Rogers acknowledged that while Canada may be somewhat insulated from the closure of the Strait, other commodities like fertilizers pass through the region, affecting Canadian farmers who are already grappling with elevated prices due to supply constraints. Prolonged conflict-induced high energy costs and expensive fertilizers could also exert upward pressure on grocery prices, given the country’s reliance on imported fresh produce.
The Bank of Canada is scheduled to announce its next interest rate decision and publish its Monetary Policy Report on April 29.