Bank of Canada holds key interest rate at 2.25%

RCI

Longer-term expectations for inflation unchanged, Macklem says.

The Bank of Canada kept its key interest rate at 2.25 per cent as expected on Wednesday and said any changes in the rate could be small if its projections for the economy held true.

But governor Tiff Macklem — citing uncertainty caused by ‌the war on Iran and U.S. tariffs — said if oil prices stay high and begin pushing up inflation, the bank might have to respond with consecutive rate hikes.

The bank says the overall effect in Canada of the war will be modest. High oil prices ​benefit Canada by increasing export revenues while squeezing businesses and consumers.

Inflation in April is expected to ⁠shoot up to about three per cent ⁠from 2.4 per cent in March while averaging around 2.3 per cent for this ‌year, but is expected to come back down to the bank’s two per cent target by early next year. The bank lifted its 2026 growth forecast to 1.2 per cent from the 1.1 per cent it had predicted in January.

But at this point, inflation was mostly contained to energy prices, and long-term inflation expectations remained anchored, Macklem said.

So far, there is little evidence that higher oil prices have fed through to other goods and services prices more broadly, Macklem said.

The bank said it was assuming that U.S. tariffs would stay unchanged while the price for a barrel of oil would dip to $75 US a barrel by mid-2027.

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If oil prices continue to increase, and particularly if they remain ⁠elevated, the risk that higher energy prices become ongoing generalized inflation increases, said Macklem.

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.

Macklem said the fate of the United States-Mexico-Canada free trade ⁠deal, the Middle East war, the impact of U.S. tariffs and knock-on effects of higher crude would determine the ⁠course of ⁠monetary policy.

The next monetary policy decision is on June 10 and money markets do not expect a rate change but they are pricing in one 25 basis point hike in October.

Thomson Reuters with files from CBC News