The Bank of Canada held its benchmark interest rate steady for a fourth consecutive time Wednesday, but officials warned uncertainty over the war in Iran and the future of U.S. tariffs could push the policy rate either higher or lower in the coming months.
The policy rate remains at 2.25 per cent after the hold, which was widely expected by economists.
Bank of Canada governor Tiff Macklem offered a rare degree of forward guidance in his prepared remarks after the rate announcement as he laid out the variety of directions the policy rate could go from here.
Macklem said the key rate is probably at about the right levels if the economy follows the central bank’s projections, though he didn’t rule out future adjustments depending on how the risks play out.
“If the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small,” he said.
“However, uncertainty is unusually elevated and there are many possible outcomes. Monetary policy may need to be nimble.”
The Bank of Canada identified two clear sources of lingering uncertainty in its updated outlook released alongside the rate decision Wednesday: the war in Iran’s effects on energy prices; and the outcome of the upcoming review of the Canada-U.S.-Mexico agreement on trade.
If the United States hits Canada with sharper trade restrictions in the wake of the review, Macklem said the Bank of Canada may need to cut the policy rate further to support the economy.
But if the Iran war pushes global energy prices higher for longer, Macklem said the central bank may be forced to tighten monetary policy – throttling growth to keep a lid on inflation.
“If this starts to happen, monetary policy will have more work to do — there may be a need for consecutive increases in the policy rate,” he said.
If global oil prices ease according to market expectations, Macklem said the central bank sees inflation peaking around three per cent in April before cooling back toward the central bank’s two per cent target by early next year. He said there’s little sign yet that higher oil prices are feeding through to broader inflation, but monetary policy-makers will be watching for changes in inflation expectations closely in the months ahead.
Despite the uncertainty, the Bank of Canada’s baseline forecast for growth hasn’t changed much from the central bank’s last outlook in January. The central bank sees real gross domestic product growing at 1.2 per cent this year and 1.6 per cent in 2027 – both a tick higher than in the January forecast.
Higher global oil prices tend to give Canada’s economy a lift, at least in the near term, because the country is a net exporter of energy. But higher prices at the pump also constrain consumers and many businesses, which can offset any gain in GDP.
The Bank of Canada’s latest outlook does not incorporate spending plans released by the federal government on Tuesday in the spring economic update.
