The Bank of Canada held its overnight rate at 2.25% on Wednesday, citing the ongoing conflict in the Middle East that is keeping energy prices high, as well as new US tariffs and Canadian counter-measures coming into effect on Sept. 8.
“Financial conditions have tightened since July. Long-term bond yields have moved up globally, including in Canada. The Canadian dollar has appreciated slightly on US-dollar weakness,” said the bank in a statement.
“As expected, Canadian economic activity strengthened in the second quarter, with GDP up by 3.3%, following very weak growth in the first quarter. While some of the recent strength reflected temporary factors, the pick-up in activity was broad-based.”
The economy showed strength in housing markets, while exports and business investment increased sharply. In addition, labour conditions improved, with the unemployment rate edging down to 6.4% in July, although demand for labour remains subdued with indications of a continued excess supply in the economy.
“Overall, recent data reaffirm Governing Council’s view of a broadening recovery in Canada’s economy. However, uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery,” said the bank.
“CPI inflation has been hovering around 3% in recent months, mainly because of persistently higher gasoline prices. So far, there has been little evidence of higher energy prices spreading to other components of inflation: excluding gasoline, inflation was 2.2% and measures of core inflation remained close to 2% in July.”
The bank cautioned the Middle East conflict and a lack of progress reopening the Strait of Hormuz, presents an upside risk to its inflation forecast.
“The longer that high oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services,” said the bank. “New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time.”
“With the economy and inflation evolving broadly as forecast in the July MPR, Governing Council agreed to leave the policy rate unchanged. However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain."