The Bank of Canada opted to maintain its key interest rate at 2.25 percent as anticipated on Wednesday and emphasized that any alterations to the rate could be minimal if the economy aligns with its forecasts. Governor Tiff Macklem suggested that the key rate is likely appropriate if economic conditions match the central bank’s predictions, although he did not dismiss the possibility of future adjustments based on evolving risks.
Macklem stated, “If the economy progresses in line with the base scenario, policy rate adjustments are expected to be minor.” However, he acknowledged the heightened uncertainty and varied potential outcomes, indicating the need for flexible monetary policy.
The bank highlighted its close monitoring of the repercussions of the Iran conflict, which has fueled a surge in energy prices, and trade policy uncertainties. Presently, the bank is overlooking the impact of soaring oil prices on inflation, but sustained high oil prices could prompt rate hikes if prolonged.
Although inflation is projected to spike to around three percent in April from March’s 2.4 percent, averaging approximately 2.3 percent for the year, it is forecasted to retreat to the bank’s two percent target by early next year. Additionally, the bank revised its 2026 growth forecast to 1.2 percent from the initial 1.1 percent estimated in January.
Macklem noted that current inflation concerns primarily revolve around energy prices, with long-term inflation expectations remaining stable. While near-term inflation expectations have risen due to elevated energy and food prices, long-term expectations are unchanged, although there is a risk of potential shifts following the COVID-19 pandemic’s impact on inflation perceptions.
The bank assumed static U.S. tariffs and anticipated a decline in oil prices to $75 per barrel by mid-2027. Macklem cautioned that sustained or escalating energy prices could lead to generalized inflation, necessitating consecutive policy rate increases.
Amidst potential future rate hikes driven by oil prices, the bank also underscored the complicating factor of ongoing trade tensions. If the United States imposes stricter trade restrictions on Canada post the upcoming CUSMA review, the bank may need to further reduce the policy rate to bolster the economy.
Senior Deputy Governor Carolyn Rogers highlighted the immediate impact of the oil crisis, emphasizing that trade tensions pose a more enduring challenge. CIBC economist Avery Shenfeld interpreted the bank’s acknowledgment of these factors as an indication of a likely prolonged period of rate stability.
The next monetary policy decision is scheduled for June 10, with money markets not anticipating a rate adjustment, but pricing in a 25-basis-point increase in October.
