The Bank of Canada decided to maintain its key interest rate at 2.25 percent on Wednesday, citing the potential impact of higher oil and gas prices due to the Middle East conflict on global inflation. However, it acknowledged the need for more time to assess how the conflict could affect the Canadian economy.
The central bank anticipates modest economic growth as it adapts to uncertainties surrounding U.S. trade policies, but it expects near-term growth to be slower than initially projected. Bank of Canada governor Tiff Macklem highlighted the added uncertainty brought by the war in Iran, stating that Canada is now facing increased volatility.
Macklem noted that inflation in Canada has hovered around the two percent target for over a year, but the surge in oil prices driven by the conflict in Iran is poised to elevate inflation in the short term. This poses a dilemma for the bank, as raising interest rates to curb inflation could further weaken the economy, while cutting rates to spur growth might push inflation above the target level.
Economist Avery Shenfeld of CIBC Capital Markets observed that the central bank did not signal any debate over whether to adjust rates currently, emphasizing the uncertainty surrounding the duration of the energy price shock. The recent surge in global energy prices, triggered by disruptions in the oil transport route through the Strait of Hormuz, is expected to drive up gas prices and consequently inflation.
The Bank of Canada stressed that it is premature to gauge the full impact of the Middle East conflict on Canada’s economic growth. The bank committed to monitoring both the war and the implications of U.S. trade policies on the economy moving forward.
Governor Macklem highlighted the mixed effects of higher energy prices on Canada’s economy, emphasizing that the outcome will be influenced by the conflict’s duration. While higher oil prices may increase income from oil exports, they could also strain households and businesses by diverting spending towards energy costs. The closure of the Strait of Hormuz may also impact other commodities like fertilizers, affecting Canadian farmers and potentially leading to higher grocery prices due to increased import costs for fresh food.
The Bank of Canada is scheduled to announce its next interest rate decision and release its Monetary Policy Report on April 29.
