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The Bank of Canada held its policy interest rate at 2.25 per cent for the fourth consecutive time on Wednesday, but warned that it would be closely watching the impact of rising oil prices on inflation in the coming months amid ongoing uncertainty caused by the war in Iran. <\/p>\n
\u201cMaintaining the policy rate today, where it is, was the right thing to do for today,\u201d Bank of Canada governor Tiff Macklem said at a news conference following the release of the decision. <\/p>\n
According to the latest Monetary Policy Report, published on Wednesday, the conflict in the Middle East has added significant uncertainty to the outlook for the Canadian economy. <\/p>\n
Inflation has been close to two per cent for over a year but rose to 2.4 per cent in March after slowing to 1.8 per cent in February. The central bank base case forecast is that inflation will peak in April at about three per cent before returning to the two per cent target in early 2027, but that is assuming global oil prices decline. <\/p>\n
U.S. tariff measures along with the uncertainty surrounding the Canada-United-States-Mexico Agreement (CUSMA) have also added to the uncertainty ahead of the July 1 CUSMA review deadline, especially since the Canadian government has not yet launched formal discussions with U.S. officials. <\/p>\n
The Bank of Canada provided a hypothetical, \u201cillustrative\u201d scenario in Wednesday\u2019s MPR in which higher energy prices remained persistent. If this happens, inflation could rise even higher and remain elevated for longer, and cost pressures from shipping disruptions and higher freight costs could pass through to consumers. This would be reflected in higher prices for goods and services. <\/p>\n
For now, however, Macklem said there is little evidence to suggest that higher energy prices have fed through to other goods and services, though the central bank will be monitoring changes closely. <\/p>\n
\u201cWe know higher oil prices are hitting Canadians. They\u2019re hitting businesses. They\u2019re hitting consumers. That\u2019s against a background where food price inflation has been running high for a number of months now. These price increases reflect global events,\u201d Macklem noted. <\/p>\n
\u201cThe best thing that could happen is that these price increases go away at the source, but that\u2019s not something we can control. What can we control? We can ensure that these price increases, particularly this surge in gasoline prices and other fuel prices, doesn\u2019t spread and become generalized, persistent inflation.\u201d <\/p>\n
Despite the uncertainty, the central bank said the Canadian economy is projected to experience some growth over the next three years as exports and business investment gradually pick up. <\/p>\n
After a contraction in the fourth quarter of 2025, the Bank of Canada has projected GDP growth will come in at 1.5 per cent for the first quarter of 2026. <\/p>\n
Overall, the central bank expects economic growth will accelerate from 1.2 per cent in 2026 to 1.6 per cent in 2027 and then 1.7 per cent in 2028, broadly in line with projections made in January. <\/p>\n
Macklem emphasized that this outlook is heavily dependent on the outcome of trade negotiations with the U.S. and the severity of the Iran war, and how the economy responds to those developments. <\/p>\n
Monetary policy needs to be \u201cnimble\u201d and consecutive increases to the policy interest rate may be needed if oil prices continue to increase, he added. <\/p>\n
\u201cThere\u2019s no set timeline here. It really depends on the conditions. It\u2019s all going to depend on what we see,\u201d Macklem said. <\/p>\n
\u201cOur job is to be a source of stability and a source of predictability\u2026. We\u2019re prepared to respond as needed.\u201d <\/p>\n
Claire Fan, senior economist at the Royal Bank of Canada , said Wednesday\u2019s rate announcement contained few surprises. <\/p>\n
The Bank of Canada cannot do anything about high global oil prices, she said, a message they\u2019ve been communicating to Canadians since at least the end of February. <\/p>\n
Core inflation also remains anchored and CPI inflation is mostly contained to energy prices, she added. <\/p>\n
\u201cThe Bank of Canada knows that headline inflation is going to rise. If you look closely at their core inflation projections, they\u2019ve barely changed from their last forecast in January,\u201d Fan said. <\/p>\n
\u201cTo me, that is very, very telling. That\u2019s consistent with their messaging, which is that \u2014 given their assumption that oil prices will moderate in 2027 \u2014 they don\u2019t expect this to spill over to core inflation.\u201d <\/p>\n
Fan also expects the central to hold its key policy rate steady throughout the year as long as core inflation holds steady at two per cent. <\/p>\n
But there are still risks, she noted. The Bank of Canada may consider consecutive increases to the policy interest rate if oil prices stay elevated for a long period of time and price hikes start to bleed into generalized inflation, she said. Generalized inflation is a systemic, persistent rise in prices across most goods and services in an economy rather than just a few items. <\/p>\n
\u201cThat\u2019s what they\u2019re really concerned about because in that scenario, it\u2019s much harder for them to contain inflation, and it will require much higher interest rates eventually,\u201d she said. <\/p>\n
\u201cBut that\u2019s not something that they expect in their base case forecast, and not something we expect in ours either.\u201d <\/p>\n
Fan recognizes that high prices at the pump are challenging for most households, especially at a time when grocery prices are already high. This is especially true for low-income households, and families can expect more fiscal support to help with affordability challenges, she said. <\/p>\n
However, she emphasized that RBC\u2019s forecasts for the economy this year are still positive. <\/p>\n