The decision comes as the war in the Middle East ‘has increased volatility’
The Bank of Canada chose to maintain the overnight rate at 2.25 per cent on Wednesday, a move widely expected by economists.
The move comes as the bank faces a difficult balancing act amid several converging pressures. The ongoing conflict in Iran has roiled global energy markets, pushing oil prices higher and creating upward pressure on inflation and bond yields.
“The war in the Middle East has increased volatility in global energy prices and financial markets and heightened the risks to the global economy. The breadth and duration of the conflict, and hence its economic impacts, are highly uncertain,” the Bank said in its official statement.
“Since the outbreak of the conflict in the Middle East, global oil and natural gas prices have risen sharply, and this will boost global inflation in the near-term. In addition to energy supply disruptions, transportation bottlenecks stemming from the effective closure of the Strait of Hormuz could impact the supply of other commodities, such as fertilizer. Financial conditions have tightened from accommodative levels. Global bond yields have risen, equity market prices have declined, and credit spreads have widened. The Canada-US dollar exchange rate has remained relatively stable,” the central bank added.
Uncertainty surrounding the upcoming review of the Canada-US-Mexico Agreement (CUSMA) continues to weigh on confidence and economic outlooks while domestic data is also sending mixed signals as annual inflation for February came in slightly below expectations at 1.8 per cent, partly due to the unwinding of last year's temporary tax holiday.
Meanwhile, the labour market has showed signs of softening, with the economy shedding 84,000 jobs in February and the unemployment rate climbing to 6.7 per cent.
“We continue to expect the Canadian economy to grow modestly as it adjusts to US tariffs and trade policy uncertainty, but recent data suggest that near-term economic growth will be weaker than anticipated in January,” the Bank said.
The central bank added it will keep a close watch on how US tariffs and broader trade policy uncertainty are affecting the Canadian economy, while also monitoring the Middle East conflict and its potential consequences for both growth and price pressures.
The bank emphasized its readiness to act if conditions warrant and reaffirmed its commitment to maintaining price stability and public confidence during a turbulent global period.
The central bank has held its policy rate steady since December.
It’s been widely speculated by economists that the Federal Reserve will also hold rates steady at their meeting later today amid US-Iran tensions.
