The Bank of Canada held its benchmark interest rate steady again on Wednesday as new U.S. tariffs and the ongoing war in Iran cloud the central bank’s outlook.
The Bank of Canada’s policy rate remains at 2.25 per cent after a seventh straight hold. The move was widely expected by economists.
Bank of Canada governor Tiff Macklem said in prepared remarks that the persistence of the Middle East conflict has increased inflationary risks as global energy prices continue to float higher.
A re-escalation in the trade dispute with the United States meanwhile threatens Canada’s burgeoning economic rebound, he said. That renewed uncertainty might lead businesses to delay investment and hiring decisions until the trade picture crystalizes.
“Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don’t jeopardize price stability in Canada,” Macklem said.
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Monetary policymakers at the Bank of Canada use the policy rate to keep a lid on inflation and support economic growth when prices are contained.
Inflation rose to three per cent in July after the Iran war drove a volatile period for gas prices over the spring and summer.
Economic growth, meanwhile, has shown signs of rebounding after stagnating for much of the last year. The economy surged with 3.3 per cent annualized growth in the second quarter, though few analysts expect that same pace continued into the current quarter.
The United States imposed 50 per cent tariffs on a range of Canadian goods on Aug. 22. Macklem said the Bank of Canada doesn’t expect a “large direct impact” on the economy from the new duties, though targeted sectors could be hit hard.
Canada is planning a slate of retaliatory tariffs on U.S. goods starting Sept. 8.
Heading into the latest wave of tariffs, Macklem said exports were on the rise and there were signs businesses were adapting to trade restrictions.
“Overall, the data reaffirm our view of a broadening recovery,” he said.
Because the economy was evolving broadly in line with the bank’s forecasts, governing council opted to keep the policy rate unchanged, Macklem said.
But he said there could be future adjustments depending on where the economy and inflation go from here.
“Governing council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed,” Macklem said.
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