Bank of Canada Holds Interest Rate, Warns Iran Conflict Could Trigger Future Hike
The Bank of Canada has left its benchmark interest rate unchanged at 2.25 per cent, while cautioning that a prolonged conflict involving Iran could fuel inflation and eventually force borrowing costs higher.
Announcing the central bank’s fifth monetary policy decision of the year on Wednesday, Governor Tiff Macklem said rising oil prices linked to the conflict have already pushed up gasoline costs, although the impact on the prices of most other goods and services has so far remained limited.
He warned, however, that if elevated oil prices persist, inflationary pressures could spread more widely across the economy.
According to Macklem, the central bank is monitoring the situation closely and remains prepared to act if higher energy costs begin driving sustained increases in consumer prices.
He stressed that while the Bank of Canada has chosen to look beyond the immediate effect of rising fuel prices, it will not allow temporary price shocks to become entrenched inflation.
The decision to keep rates steady was widely anticipated by economists, who pointed to easing inflation and improving economic conditions as reasons for maintaining the current policy stance.
David-Alexandre Brassard, Chief Economist at CPA Canada, said the move came as no surprise, noting that inflation is approaching the bank’s target while concerns about a recession have eased in recent months.
Although Canada’s economy has shown signs of recovery, Macklem acknowledged that trade tensions with the United States and the impact of tariffs have contributed to uneven economic growth over the past year.
He said the country’s economic performance has begun to improve, with gross domestic product rebounding in April, unemployment falling to 6.5 per cent in June and underlying inflation showing signs of stabilising despite higher fuel prices.
Canada entered a technical recession earlier this year after recording two consecutive quarters of economic contraction, but recent indicators suggest growth is gradually returning.
While the central bank’s baseline outlook does not anticipate another interest rate increase, Macklem warned that a prolonged period of high oil prices could alter that outlook, adding that policymakers stand ready to adjust monetary policy if inflation risks intensify.
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