The Bank of Canada held its key overnight lending rate steady for the fifth straight time on Wednesday, leaving it at 2.25%, as it tries to balance weak economic growth against renewed inflation pressure from higher energy prices.
In its statement, the central bank said the ongoing conflict in the Middle East is weighing on global growth, disrupting supply chains, and pushing energy prices higher. At the same time, proposed new U.S. tariffs continue to add uncertainty to the outlook for trade and investment.
Governor Tiff Macklem said in prepared remarks that monetary policy is now facing a difficult mix of weak domestic activity and rising headline inflation. Raising rates could further slow the economy, while cutting rates could increase the risk that higher energy costs become embedded in broader price pressures.
Canada’s economy contracted by 0.1% in the first quarter, weaker than the Bank had expected in its April Monetary Policy Report. Consumer spending rose 1.4%, but housing activity declined, business investment remained soft and exports fell. Employment improved in May, but the Bank said job growth has been largely flat since the start of the year, with the unemployment rate fluctuating in the 6.5%-7% range. The latest reading was 6.6%.
The Bank said growth is expected to resume in the second quarter, helped by continued consumer spending and more stable housing activity. Even so, the economy is still expected to remain relatively weaker.
Inflation, meanwhile, rose to 2.8% in April, driven mainly by higher oil prices and the fading impact of the removal of the consumer carbon tax from the annual comparison. Core inflation measures have moved down to around 2%, while food inflation has moderated but remains elevated, and shelter inflation continues to ease.
With oil prices roughly US$10/barrel above the Bank’s April assumptions, inflation is expected to hover near 3% in the coming months before gradually easing toward the 2% target. Macklem said the Bank is prepared to look through the war’s near-term impact on inflation but will not allow higher energy prices to become persistent, broad-based inflation.
He added the Bank may need to be “nimble” if conditions change. Significant new U.S. trade restrictions could require further rate cuts to support growth, while a broader inflation surge could force the Bank to raise rates again.
