OTTAWA — The Bank of Canada is set to make its fifth interest rate announcement of the year on Wednesday following a turbulent few weeks on the global stage and in Canadian economic data.
Despite the flurry of developments since the central bank’s last rate decision in June, most economists are expecting monetary policymakers to leave the key borrowing rate unchanged at 2.25 per cent.
The Bank of Canada has been walking a tightrope lately as forces like U.S. tariffs and the Iran war threaten to both weaken growth and push inflation higher.
The annual rate of inflation hit 3.2 per cent in May as the Middle East conflict and shuttered Strait of Hormuz spurred a global energy shock in the spring. That marks the highest rate of inflation since late 2023.
Global oil prices receded after Iran and the United States agreed to a ceasefire in mid-June, but hostilities reignited between the nations last week, casting doubt over a lasting peace deal.
Tony Stillo, director of Canada economics at Oxford Economics, said those renewed pressures reinforce the bind the Bank of Canada finds itself in.
“This is exactly the risk that we still continue to highlight: a re-escalation, a resurgence in prices and those concerns the Bank of Canada had in their last meeting, saying we have to be ready to react in either direction — and that’s where unfortunately where we may be again,” he said.
The future direction for the policy rate could be higher or lower, central bank officials say, depending on whether the bank needs to lean against higher prices or stimulate growth.
Bank of Canada governor Tiff Macklem has said the bank will look through the short-term rise in inflation tied to the Iran war.
What the bank’s governing council is more worried about, he said, is if that inflationary bout shows signs of spreading to other areas of the consumer basket.
RBC senior economist Claire Fan said that while inflation topped the Bank of Canada’s target range of one to three per cent in May, there were some encouraging signals beneath the hood.
A review of each category suggests price pressures from the Iran war were not spreading far beyond the gas pumps, Fan said.
“A lot of those concerns with inflation surrounding its persistence have, if anything, come down quite a bit,” she said.
The Bank of Canada’s own quarterly survey of businesses released a week ago suggested that roughly a third of firms facing higher prices from the Middle East conflict were preparing to pass on those costs to consumers.
But Fan noted the bulk of the central bank’s survey was conducted in May, before global oil prices were falling on the prospect of a ceasefire and the Strait of Hormuz re-opening.
