Bank of Canada keeps key interest rate at 2.25% and says war will increase global inflation

The Bank of Canada on Wednesday kept its key interest rate at 2.25 per cent and said higher oil and gas prices due to the war in the Middle East are likely to increase global inflation, but it is too early to assess the impact of the conflict on the Canadian economy.

The bank expects the economy to grow “modestly” as it adjusts to US trade policy uncertainty, but near-term growth will be weaker than anticipated at the start of the year.

Meanwhile, during a morning press conference in Ottawa, Bank of Canada Governor Tiff Macklem said the war in Iran has added “a new layer of uncertainty” to that backdrop and that Canada faces more volatility than before.

“Inflation in Canada has been close to two percent target For more than a year. “But, as we have seen, oil prices are rising rapidly because of the war in Iran and this will lead to inflation in the short term.”

As a result, the bank faces a dilemma, Macklem said: Raising interest rates to tame inflation could further weaken the economy, but cutting to support growth could send inflation above the central bank’s target.

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“When we get the March (consumer price index) report, it will be known that inflation is rising,” he said. While Macklem was characteristically silent about the direction of rates, “We will make sure that if energy prices remain high, it does not become sustained, generalized, persistent inflation.”

CIBC Capital Markets economist Avery Shenfeld said the central bank gave no indication it was debating a cut or a hike at this point.

This is consistent with the bank’s view that “the impact of an energy price shock will critically depend on how long it persists, which is simply unknown at this point,” he wrote.

‘Too early’ to know impact of war

This decision comes after a Vulnerable Labor Force Survey The economy lost 84,000 jobs in February. Monday’s inflation reportOn the other hand, it shows that the Bank’s preferred core measure of inflation (which strips out volatile gas prices and tax changes) is slowing.

But the recent, sharp rise in global energy prices – caused by wartime disruptions in the Strait of Hormuz, a narrow waterway south of Iran that is a vital pipeline for global oil transport – will push up gas prices in the short term, and with them inflation.

The Bank stressed in its decision that it is “too early” to know the impact of the conflict in the Middle East on Canada’s economic growth, but that it will continue to assess both the impact of the war and U.S. trade policy on the economy.

Look What do high oil prices mean for Canada?:

Bank of Canada Governor on what rising oil prices mean for Canada

Bank of Canada Governor Tiff Macklem explains what rising oil prices due to conflict in the Middle East could mean for Canada’s economy.

Asked whether the increase in energy prices would be a net positive or negative for the Canadian economy, Macklem said those shocks would have multiple effects and their outcome would depend on the duration of the conflict.

“If oil prices remain high for a long time, it means the country’s income from oil exports… will be higher,” the governor said. But he stressed that higher oil prices will hit households and businesses, and spending more on energy costs but less on everything else will weigh on consumption.

Both Macklem and Senior Deputy Governor Caroline Rogers said that, while Canada has been spared from the closure of the strait to some extent, other commodities such as fertilizer travel also Through that corridor, and Canadian farmers Already feeling the high prices Due to supply crisis.

Depending on the duration of the conflict, higher energy prices and expensive fertilizers could also put pressure on grocery prices because “we import so much of our fresh food,” Rogers said.

The Bank of Canada is set to make its next interest rate decision and will release its next monetary policy report on April 29.