The Bank of Canada opted to maintain its key interest rate at 2.25 per cent on Wednesday, in line with expectations. Governor Tiff Macklem indicated that any adjustments to the rate would likely be minor if the economy progresses as forecasted by the central bank. However, Macklem acknowledged the possibility of future changes based on evolving risks.
Amid heightened uncertainty, the bank is closely monitoring the impacts of the conflict in Iran, which has led to a surge in energy prices, and trade policy uncertainties. Although the current surge in oil prices is being overlooked in inflation calculations, prolonged high oil prices could prompt rate hikes.
Inflation is projected to rise to approximately three per cent in April from 2.4 per cent in March, with a yearly average of around 2.3 per cent. The bank raised its growth forecast for 2026 to 1.2 per cent from the previously predicted 1.1 per cent in January.
Macklem emphasized that current inflation is primarily contained within energy prices, with long-term inflation expectations remaining stable. While near-term inflation expectations have increased due to higher energy and food prices, the long-term outlook is steady.
There are concerns that inflation expectations may not be as anchored as before the pandemic, with Macklem highlighting public discontent during the pandemic-induced inflation spike to 8.1 per cent. The bank is assuming that U.S. tariffs will remain unchanged while predicting a drop in oil prices to $75 per barrel by mid-2027.
Macklem warned that sustained high energy prices could lead to generalized inflation, necessitating consecutive rate hikes if this scenario unfolds. Additionally, the bank mentioned ongoing trade tensions as another complicating factor in the economic landscape.
In case the U.S. imposes stricter trade restrictions on Canada following the upcoming CUSMA review, Macklem suggested the possibility of further rate cuts to bolster the economy. Senior Deputy Governor Carolyn Rogers highlighted the short-term impact of the oil crisis and the longer-term implications of trade tensions.
Economist Avery Shenfeld from CIBC remarked that the inclusion of both factors in the bank’s assessment indicates a likely prolonged status quo in monetary policy. The next monetary policy decision is scheduled for June 10, with market expectations leaning towards no rate change, but pricing in a 25-basis-point hike in October.