The Bank of Canada maintained its target for the overnight rate at 2.25% on Wednesday, a decision that aligned with market expectations and reflected what policymakers described as a complex and evolving risk environment.
In prepared remarks, Governor Tiff Macklem pointed to elevated uncertainty tied to US trade policy and geopolitical developments in the Middle East. Macklem specifically said the war in Iran has introduced an additional layer of uncertainty that could affect the Canadian economy depending on how long the conflict persists.
Policymakers noted that since the outbreak of the conflict and the subsequent closure of the Strait of Hormuz, prices for oil and natural gas have risen sharply. That jump in energy prices has heightened downside and upside risks for the global economy - on the one hand tightening financial conditions as global bond yields rise and equity market prices fall, and on the other hand threatening to push inflation higher in the near term.
The Bank's recent assessment of growth reflects these headwinds. After a 2.4% expansion in the third quarter, Canadian GDP contracted by 0.6% in the fourth quarter. The central bank said this outcome was weaker than anticipated in its January Monetary Policy Report, largely because inventories were drawn down by more than expected.
On inflation, Macklem highlighted that headline CPI eased to 1.8% in February. Still, he warned that recent increases in gasoline prices are likely to lift total inflation in coming months. The Bank reiterated its commitment to preserving Canadians' confidence in price stability through this period of global upheaval.
The Governing Council signalled readiness to adjust policy as required, indicating it will monitor developments closely - including US tariffs and disruptions around the Strait of Hormuz. The Bank said its goal is to support economic activity while preventing a temporary spike in energy costs from becoming entrenched inflation.
This policy decision leaves the overnight target at 2.25% while emphasizing vigilance toward external shocks that could influence inflation and growth in the near term.