The Bank of Canada maintained its key interest rate at 2.25 percent on Wednesday, in line with expectations, and indicated that any adjustments to the rate would likely be minor if economic projections hold true. According to Governor Tiff Macklem, the current key rate is deemed appropriate if the economy aligns with the central bank’s forecasts, although potential future modifications are not ruled out based on evolving risks.
Macklem emphasized that if the economy progresses as projected, changes in the policy rate are anticipated to be limited. Nevertheless, given the elevated level of uncertainty and various potential outcomes, monetary policy may need to be flexible.
The central bank is closely monitoring the impacts of the Iran conflict, which has driven energy prices higher, as well as trade policy uncertainties. Despite the surge in oil prices, the bank is currently overlooking its inflationary effects, while acknowledging that sustained high oil prices could necessitate rate hikes. The overall impact of the conflict on Canada is expected to be modest, with increased export revenues offsetting pressures on businesses and consumers.
Inflation is projected to rise to around three percent in April from 2.4 percent in March, averaging approximately 2.3 percent for the year but reverting to the bank’s two percent target by early next year. The bank has revised its 2026 growth forecast to 1.2 percent, up from the previous 1.1 percent estimate in January.
Macklem noted that current inflation concerns are primarily confined to energy prices, with long-term inflation expectations remaining stable. While short-term inflation expectations have increased due to elevated energy and food prices, the long-term outlook remains anchored.
There is a perceived risk that inflation expectations may not be as firmly anchored as before the COVID-19 pandemic, with Macklem referencing public discontent during the pandemic’s peak inflation of 8.1 percent.
The bank’s assumptions include unchanged U.S. tariffs and a projected decrease in oil prices to $75 US per barrel by mid-2027. Macklem cautioned that sustained high energy prices could lead to broader inflation, potentially requiring consecutive policy rate increases.
Additionally, the Bank of Canada highlighted the ongoing trade war as a complicating factor. If the United States imposes harsher trade restrictions on Canada following the upcoming CUSMA review, Macklem suggested that further policy rate cuts may be necessary to support the economy.
CIBC economist Avery Shenfeld interpreted the bank’s mention of these factors as a signal of its likely intention to maintain the current rate for the foreseeable future. The next monetary policy decision is scheduled for June 10, with money markets not anticipating a rate change but pricing in a 25-basis-point hike in October.
