By Promit Mukherjee and David Ljunggren
OTTAWA, April 29 (Reuters) – The Bank of Canada kept its key interest rate unchanged on Wednesday as expected and said any changes in the rate could be small if its projections for the economy held true.
But Governor Tiff Macklem – citing uncertainty caused by the Middle East war and U.S. tariffs – said if oil prices stayed high and began pushing up inflation, it might have to respond with consecutive rate hikes.
Macklem’s comments marked the first time in recent years that he has been so specific about the path of interest rates.
“If things evolve broadly in line with the outlook we have presented, and in particular, oil prices come down broadly in line with the futures curve, something close to the policy rate that we have today is probably about right,” he said.
The bank says the overall effect of the war on Canada will be modest. High oil prices benefit Canada by increasing export revenues while squeezing businesses and consumers.
Inflation in April is expected to shoot up to about 3% from 2.4% in March while averaging around 2.3% for this year. The bank lifted its 2026 growth forecast to 1.2% from the 1.1% it had predicted in January.
The bank said it was assuming that U.S. tariffs would stay unchanged while the price for a barrel of oil would dip to $75 a barrel by mid-2027.
“If oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing generalized inflation increases,” said Macklem.
“If this starts to happen, monetary policy will have more work to do – there may be a need for consecutive increases in the policy rate.”
Wednesday marked the central bank’s first set of projections since the Iran war began on February 28, driving up crude and gasoline prices.
Royce Mendes, head of macro strategy at Desjardins, said the BoC appears comfortable leaving rates unchanged for the rest of the year, unless oil prices remain high.
Once the economy recovers, central bankers will raise the policy rate gradually to 2.75%, he said, predicting that would not be till 2027.
“So far, there is little evidence that higher oil prices have fed through to other goods and services prices more broadly,” Macklem said.
Near-term inflation expectations have risen due to higher energy prices and elevated food prices, but long-term inflation expectations remain anchored, he noted.
There is a risk that inflation expectations are not as well anchored as they were before COVID, Macklem said, noting public unhappiness when inflation spiked to 8.1% during the pandemic.
The Governing Council will be closely watching inflation expectations, Macklem said. The bank feels inflation will be back down to the 2% target by early 2027.
Macklem said the fate of the United States-Mexico-Canada free trade deal, the Middle East war, the impact of U.S. tariffs and knock-on effects of higher crude would determine the course of monetary policy.
Economists and analysts are divided on the impact of higher crude oil prices on Canada, a net exporter. A fiscal update presented by Prime Minister Mark Carney’s government on Tuesday said nominal GDP would rise this year.
A majority of economists polled by Reuters last week said they do not expect any change in rates this year.
The next monetary policy decision is on June 10 and money markets do not expect a rate change but they are pricing in one 25 basis point hike in October.
The Canadian dollar weakened after the monetary policy report with the loonie trading down 0.18% to C$1.3707 against the U.S. dollar, or 72.96 U.S. cents.
(Reporting by Promit Mukherjee and David LjunggrenEditing by Nick Zieminski)
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