Bank of Canada Holds Policy Rate Steady, Expects Inflation to Peak in April -- 2nd Update

By Paul Vieira

OTTAWA--The Bank of Canada on Wednesday kept its policy interest rate unchanged at 2.25%, and signaled the rate may stay close to that level so long as the economy evolves as forecast.

The central bank's quarterly forecast expects inflation to peak in April at around 3% and assumes crude-oil prices fall to $75 a barrel by mid-2027. The forecast also anticipates no changes in U.S. tariffs on Canadian goods -- so neither a breakthrough on U.S.-Canada trade talks nor an escalation in U.S. levies.

Overall, the Bank of Canada largely kept its growth forecast intact, noting the economy stands to benefit from current geopolitical volatility as a net exporter of crude oil. The anticipated rise in national income would help offset the strains posed by President Trump's tariffs.

Bank of Canada Gov. Tiff Macklem said officials agreed not to overreact to a near-term surge in inflation. "But if energy prices stay high, we will not let their effects become persistent inflation," he said.

The threat of higher inflation represents another adjustment for Macklem and senior central bank policymakers, as they were previously focused on supporting an economy struggling under the weight of U.S. tariffs. Fixed-income traders have increased bets on at least one interest-rate increase in Canada before the end of 2026, reflecting heightened inflation risks from the conflict in the Middle East.

Energy prices have climbed as oil-tanker traffic has effectively stopped on the Strait of Hormuz. The war in Iran also is pushing aluminum and fertilizer costs upward.

Some economists, like Avery Shenfeld at CIBC Capital Markets, said the central bank appears content to stand pat and guard against both the upward risk posed by higher energy prices and the danger of slower economic growth from U.S.-Canada trade turbulence. Other analysts, like Bradley Saunders from Capital Economics, said the probability of rate increases as early as this year has increased, pointing to Macklem's remarks that consecutive hikes may be necessary should energy prices stay higher for longer.

"Maintaining the policy rate today where it is was the right thing to do for today," Macklem said. "But I will stress that there is no risk-free path for the policy interest rate."

The price of a barrel of West Texas Intermediate crude is up 5% Wednesday to over $105, while Brent crude prices also rose to nearly $110.

Inflation in Canada accelerated in March, by 2.4%, although that was less than expected, while other gauges indicated that core prices -- which strip out volatile items like food and energy -- were mostly contained. The central bank said Wednesday there is little evidence that oil prices have lifted the cost of other goods and services prices, "but this warrants close attention in the months ahead."

After inflation peaks in April, the Bank of Canada said it projects a deceleration to 2.5% in June, in part due to Prime Minister Mark Carney's decision to temporarily suspend a fuel-excise tax. The central bank also expects shelter costs, like rent, to slow, and that excess spare capacity will keep a lid on unit labor costs. This should bring inflation back to 2% by early 2027.

Macklem said near-term inflation expectations have risen, but longer-term expectations remain anchored.

Based on the central bank's outlook, "a policy rate close to current settings looks appropriate to support adjustment in the economy and return inflation to target," Macklem said. "There may still be a need to adjust the policy rate depending on how the risks evolve. But if the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small."

Macklem added that the outcome of a U.S.-led review of the current U.S.-Mexico-Canada trade treaty, known as USMCA, will weigh heavily on the direction of rate policy -- as will the war in Iran and the impact of U.S. tariffs. Talks between Washington and Ottawa are at a standstill, whereas the U.S. and Mexico have moved to an advanced stage. Carney has said Canada is prepared to wait things out until its demands are met, such as relief from hefty sector-specific tariffs.

"If the U.S. imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth," Macklem said.

Write to Paul Vieira at [e-mail]

(END) Dow Jones Newswires

04-29-26 1158ET