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OTTAWA \u2014 The Bank of Canada held its benchmark interest rate steady for a fourth consecutive time Wednesday, but officials warned uncertainty over the war in Iran and the future of U.S. tariffs could push the policy rate either higher or lower in the coming months.<\/p>\n
The policy rate remains at 2.25 per cent after the hold, which was widely expected by economists.<\/p>\n
Bank of Canada governor Tiff Macklem spoke after the rate announcement, where he offered rare insight into the variety of directions the policy rate could go from here.<\/p>\n
Macklem said the key rate is probably at about the right level if the economy follows the central bank\u2019s projections, though he didn\u2019t rule out future adjustments depending on how the risks play out.<\/p>\n
\u201cIf the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small,\u201d he said.<\/p>\n
\u201cHowever, uncertainty is unusually elevated and there are many possible outcomes. Monetary policy may need to be nimble.\u201d<\/p>\n
The Bank of Canada identified two clear sources of lingering uncertainty in its updated outlook released alongside the rate decision Wednesday: the war in Iran\u2019s effects on energy prices; and the outcome of the upcoming review of the Canada-U.S.-Mexico trade agreement.<\/p>\n
If the United States hits Canada with sharper trade restrictions in the wake of the review, Macklem said the bank may need to cut the policy rate further to support the economy.<\/p>\n
But if the Iran war pushes global energy prices higher for longer, Macklem said the central bank may be forced to tighten monetary policy \u2014 throttling growth to keep a lid on inflation.<\/p>\n
\u201cIf this starts to happen, monetary policy will have more work to do \u2014 there may be a need for consecutive increases in the policy rate,\u201d he said.<\/p>\n
Speaking to reporters Wednesday, Macklem said today\u2019s uncertainty is unusual because it\u2019s tied to geopolitical events \u2014 something the central bank can\u2019t assign probabilities to.<\/p>\n
He was asked what the central bank would do if Canada faced steeper tariffs and a sustained increase in global oil prices at the same time, but he would only offer a general answer.<\/p>\n
\u201cWhat we\u2019re trying to convey is the direction and the rough magnitude of how we would respond given certain situations,\u201d he said.<\/p>\n
\u201cObviously, if it\u2019s a combination, it\u2019s going to be even more complicated. And we\u2019ll have to weigh the various factors.\u201d<\/p>\n
Macklem also did not offer a timeline for how long oil prices would need to stay elevated for the Bank of Canada to respond with rate hikes, saying it would depend on how the energy price shock was showing up in the inflation data.<\/p>\n
Statistics Canada reported a jump in the annual inflation rate to 2.4 per cent in March thanks mostly to a surge in gas prices.<\/p>\n
The Bank of Canada\u2019s outlook assumes global oil prices ease from around US$100 per barrel currently to US$75 per barrel by mid-2027. Macklem said, in that scenario, the central bank sees inflation peaking around three per cent in April before cooling back toward the bank\u2019s two per cent target by early next year.<\/p>\n
He said there\u2019s little sign yet that higher oil prices are feeding through to broader inflation, but monetary policy-makers will be watching for changes in inflation expectations closely in the months ahead.<\/p>\n
\u201cIf we\u2019re in a situation where the shock is bigger \u2014 in particular, is more persistent \u2014 and we see growing evidence of propagation, that would be a clear signal that, yes, rates probably do need to go higher to get inflation back to target,\u201d Macklem said.<\/p>\n
The bank\u2019s monetary policy report noted that the federal government\u2019s move to pause the fuel excise tax until Labour Day will help \u201ccushion part of the increase\u201d in inflation from higher gas prices.<\/p>\n
But the report also warns that rising fertilizer prices could put pressure on agricultural costs in the months ahead. That could fuel more increases in already stubborn food inflation, the bank warns.<\/p>\n
CIBC chief economist Avery Shenfeld said in a note to clients Wednesday that the decision to hold the rate steady \u201ccame as no surprise given the clouded outlook.\u201d<\/p>\n
He said the Bank of Canada\u2019s decision to highlight the possibility of both rate hikes and cuts implies the bank is prepared to remain on the sidelines for now.<\/p>\n
Despite the uncertainty, the Bank of Canada\u2019s baseline forecast for growth hasn\u2019t changed much from its last outlook in January. It sees real gross domestic product growing at 1.2 per cent this year and 1.6 per cent in 2027 \u2014 both a tick higher than in the January forecast.<\/p>\n
Higher global oil prices tend to give Canada\u2019s economy a lift, at least in the near term, because the country is a net exporter of energy. But higher prices at the pump also constrain consumers and many businesses, which can offset any gain in GDP.<\/p>\n
The Bank of Canada\u2019s latest outlook does not incorporate spending plans released by the federal government on Tuesday in the spring economic update.<\/p>\n
\u00a92026 The Canadian Press<\/strong><\/p>\n<\/p><\/div>\n