Bank of Canada holds key interest rate at 2.25%, saying war will boost global inflation
CBC
The Bank of Canada held its key interest rate at 2.25 per cent on Wednesday, saying that higher oil and gas prices from the war in the Middle East are likely to boost global inflation, but that it's too soon to assess the conflict's impact on the Canadian economy.
The bank expects the Canadian economy will grow "modestly" as it adjusts to U.S. trade policy uncertainty, but that recent data suggests that near-term economic growth will be weaker than the bank anticipated at the beginning of the year.
The war in Iran has added "a new layer of uncertainty" and Canada is facing more volatility, said Bank of Canada governor Tiff Macklem during a press conference in Ottawa.
"Inflation in Canada has been close to the two per cent target for more than a year. But, as we’ve seen, the war in Iran is causing oil prices to move sharply higher and this will push up inflation in the short term."
Macklem said that raising interest rates to slow inflation could further weaken the economy, but that cutting to support growth could push inflation abovethe central bank's target.
"When we get the March [consumer price index] report, it's going to show that inflation's going up," said Macklem. "We will ensure that if energy prices stay high, that does not become ongoing, generalized, persistent inflation."
The decision comes on the heels of a weak labour force survey that saw the economy lose 84,000 jobs in February. Monday's inflation report showed that the bank's preferred core measures of inflation (which strip out volatile elements like gas prices and tax changes) are moderating.
But the recent, sharp rise in global energy prices — triggered by wartime disruptions to the Strait of Hormuz, a narrow waterway south of Iran that is a crucial pipeline for global oil transport — will push up gas prices, and with them inflation, in the short term.
Still, "it’s too early to assess the impact of the conflict in the Middle East on growth in Canada," the council wrote, adding that it will continue to assess both the war and the impact of U.S. trade policy on Canada's economy.
Asked whether the increase in energy prices will be a net positive or net negative for the Canadian economy, Macklem said those shocks will have multiple effects and that their outcome will depend on the duration of the conflict.
"If oil prices stay high for an extended period, that does mean the income coming into the country from our exports of oil ... will be higher," said Macklem. But he stressed that higher oil prices will squeeze households and businesses, and that spending more on energy costs but less on everything else will hurt consumption.
He also noted that while Canada is somewhat shielded from the Strait's closure, "oil and natural gas are not the only commodities that go through the Strait of Hormuz."
If fertilizers are blocked, "that will have other global impacts."
Avery Shenfeld, an economist at CIBC Capital Markets, noted that the central bank didn't give any indication there was debate over whether to cut or hike at this point.
