Bank of Canada Holds Interest Rates Steady as Officials Grapple With Policy Dilemma — 2nd Update

The Bank of Canada announced Wednesday it would maintain its policy interest rate at 2.25%, marking its fifth consecutive decision to keep rates unchanged. Governor Tiff Macklem stated that the current rate level balances the risks of further slowing economic growth and allowing inflation to persist. The bank expects inflation to remain around 3% in the coming months, driven primarily by elevated crude-oil prices, though it has seen little evidence of broader price increases beyond energy costs. Canada’s gross domestic product shrank by 0.1% annualized in the first quarter, following a 1.5% contraction in the fourth quarter, raising debates about a potential recession. However, the C.D. Howe Institute’s business-cycle council ruled out a recession declaration, citing insufficient depth and diffusion in the downturn. Macklem acknowledged economic weakness but noted that while growth has stalled, the economy has not clearly entered a recession. The bank’s decision reflects uncertainty over global factors, including the Middle East conflict and U.S. trade policy. Macklem outlined potential triggers for future rate changes: a cut if the U.S. imposes new trade measures against Canada, or hikes if the Iran-U.S. war prolongs energy price spikes and embeds inflation expectations. He emphasized that while the bank will look past the war’s near-term inflation impact, sustained high energy prices could force broader policy adjustments. Inflation in Canada rose 2.8% year-over-year in April, but core inflation—excluding volatile items like food and energy—averaged 2.05%, the slowest pace in over five years. Economists, including Charles St-Arnaud of Servus Credit Union, expect the Bank of Canada to hold rates steady for the remainder of 2024, given the conflicting pressures of weak growth and inflation risks. Macklem reiterated that the bank remains vigilant, ready to act if economic conditions warrant further intervention.