Key facts
- The Bank of Canada maintained its key interest rate at 2.25%.
- This marks the fifth consecutive meeting the rate has been held steady.
- The bank sees limited evidence of broad-based inflation stemming from higher energy prices.
- Officials stated they would not hesitate to raise rates if necessary to curb inflation.
- Canada's economy contracted in the first quarter, described as weak by the Governor.
- Money markets are pricing in a 25-basis-point rate hike in December.
The Bank of Canada held its key interest rate steady at 2.25% for the fifth consecutive meeting, citing limited evidence that higher energy prices were fueling broad-based inflation. Governor Tiff Macklem emphasized that the bank would raise rates if necessary to keep inflation in check.
Wednesday's decision comes amid conflicting economic data. Canada's economy posted a surprise contraction in the first quarter, marking two straight quarters of annualized decline, which some economists term a technical recession. Macklem described the economy as "weak" rather than in recession. While Canada's overall inflation rate rose to 2.8% in April, the bank noted that hiring data had been choppy. Officials are monitoring the impact of higher energy prices, exacerbated by the war with Iran, on household budgets but stated they would not let these prices become persistent inflation.
Economists surveyed by Reuters largely expected the hold, with most predicting rates would remain unchanged throughout the year. However, money markets are still pricing in a 25-basis-point hike in December. The bank acknowledged the dilemma posed by the Middle East war, where raising rates to curb inflation could slow the economy, while easing rates to support growth increases inflation risk. Holding rates balanced these risks for now.
Uncertainty surrounding the upcoming review of the United States-Mexico-Canada Agreement (USMCA) was identified as a significant factor weighing on the economic outlook. Macklem indicated that significant new trade restrictions from the U.S. could prompt rate cuts, while generalized inflation from higher energy prices might necessitate consecutive rate hikes.