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The Bank of Canada held its key interest rate at 2.25 per cent on Wednesday, predicting the economy would rebound after some rockiness earlier in the year.
Risks and uncertainty remain due to the war in the Middle East and ongoing trade talks with the U.S., according to the release. But officials at the central bank are growing more confident that the economy is working its way through those headwinds.
“After stalling over the past year, economic growth looks to have resumed in Canada,” Bank of Canada governor Tiff Macklem said in prepared remarks.
A hold was widely expected by economists in the leadup to the decision — all 36 economists surveyed by Reuters ahead of the announcement expected the central bank to hold rates, with a majority forecasting no change until at least July of next year. This decision marked the sixth consecutive time the bank chose to keep interest rates as is.
While Canada’s economic growth hit snags in the first part of the year, there are “clear signs” that growth has resumed in the second quarter, according to the bank.
A contraction in the economy to start the year surprised the central bank, which had expected annualized growth of 1.5 per cent in the first and second quarters.
But to the bank’s monetary policy report out today, those drags are subsiding as consumer and government spending picks up. The bank predicts the economy will grow by 2.5 per cent in the second quarter.
Growing exports are also expected to help give business investment a boost in coming months, the bank says.
And while inflation ticked up further in May to 3.2 per cent, the Bank of Canada says it doesn’t look like the higher cost of gas is spilling over into the cost of other products — something officials at the bank have been watching, and promising to guard against.
WATCH | Higher vegetable prices contributed to rising inflation in May:
Higher vegetable prices pushed inflation upward in May
Canada’s inflation rate rose 3.2 per cent in May, driven largely by fuel and food prices. Fresh vegetables saw particularly sharp increases, with tomatoes costing 45 per cent more than they did a year ago.
The bank expects inflation will remain high in June before easing in coming months, predicting the inflation rate will fall to 2.5 per cent in the second half of 2026, before reaching the two per cent target in early 2027.
Still, Macklem noted that’s very dependent on what happens in the Middle East.
“We’ve been looking through the direct effects of higher oil prices on inflation, but the longer they remain elevated, the bigger the risk they spill over to other goods and services,” Macklem said.
During a news conference, Macklem told reporters that if gas prices move up again and remain high for longer, a series of rate hikes are still on the table to guard against persistent inflation, reiterating that they would “not let higher oil prices become persistent inflation.”
WATCH | Oil prices rise again:
Oil prices jump as conflict between U.S., Iran escalates
Hostilities threatening the Strait of Hormuz led the U.S. to renew attacks and reimpose its naval blockade in Iran Tuesday, with oil prices surging to four-week highs as a result.
The phenomenon of rising inflation and slow growth has so far posed a dilemma for the bank, as raising interest rates would help combat inflation, but lowering them would give growth a leg up.
But if inflation eases and growth picks up as the bank hopes, this contradiction could start to subside.
“If this forecast plays out, this dilemma will be resolving itself,” Macklem said following the release. Macklem flagged, however, that there’s still a risk that inflation gets stuck above the two per cent target, and that growth doesn’t recover as quickly as expected.
The bank’s governing council said the current rate is still at the right level to bring inflation back to the two per cent target, though noted that it remained ready to change rates if needed.
While BMO’s chief economist Douglas Porter says some positive data led to a more upbeat forecast in the near term, all of that uncertainty is still weighing on any longer-term optimism. He says up-and-down oil prices especially remain a big “X-factor” for the bank.
Still, he expects the central bank will remain firmly on hold for the rest of the year.
“It doesn’t seem like the bank is in any rush whatsoever to move off the sidelines, even if their rhetoric leans slightly hawkish,” Porter said.