Market Update: Bank of Canada holds key interest rate at 2.25%, saying war will boost global inflation – Full Analysis

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 economy will grow “modestly” as it adjusts to U.S. trade policy uncertainty, but that near-term growth will be weaker than it anticipated at the beginning of the year.

Meanwhile, the war in Iran has added “a new layer of uncertainty” against that backdrop and Canada is facing even more volatility than before, said Bank of Canada governor Tiff Macklem during a morning news 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.”

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

• Do you have questions about how gas prices affect your day-to-day costs? Send them to us at ask@cbc.ca.

“When we get the March [consumer price index] report, it’s going to show that inflation’s going up,” he said. While Macklem was characteristically tight-lipped about the direction of rates, “we will ensure that if energy prices stay high, that does not become ongoing, generalized, persistent inflation.”

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.

That’s in line with the bank’s perspective that “the implications of the energy price shock will depend critically on how long it persists, which simply is unknowable at this point,” he wrote.

‘Too early’ to know war’s impact

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, on the other hand, showed that the bank’s preferred core measures of inflation (which strip out volatile 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.

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

WATCH | What do higher oil prices mean for Canada?:

Bank of Canada governor on what oil price increases mean for Canada

Tiff Macklem, governor of the Bank of Canada, weighed in on what rising oil prices due to the conflict in the Middle East could mean for Canada’s economy.

Asked whether the increase in energy prices will be a net positive or net negative for Canada’s 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 the governor. 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.

Both Macklem and senior deputy governor Carolyn Rogers said that, while Canada is somewhat shielded from the Strait’s closure, other commodities like fertilizers also travel through that corridor, and Canadian farmers are already feeling higher prices from the supply crunch.

Depending on the duration of the conflict, higher energy prices and costly fertilizer could also put upward pressure on grocery prices because “we import a lot of our fresh food,” said Rogers.

The Bank of Canada is set to make its next interest rate decision and will release its next Monetary Policy Report on April 29.