Minutes released Wednesday from the Bank of Canada’s governing council indicate policymakers expect to rely more heavily on judgment than usual when making future interest-rate decisions, citing heightened global uncertainty.
The Bank of Canada maintained its key policy rate at 2.25% on March 18. Governor Tiff Macklem told the council that the immediate inflationary effects of the war in Iran should be viewed through a shorter-term lens, but that the bank would act if higher inflation proved persistent.
The conflict in Iran has pushed benchmark crude oil prices substantially higher and raised the prospect of a broader rise in inflationary pressures. The seven-member rate-setting council said it was premature to judge the long-run economic consequences of the conflict.
"They acknowledged that they would need to rely on judgment more heavily than usual and take a risk management approach to monetary policy," the bank said in a summary of deliberations.
The summary added that council members "agreed to keep options open while closely monitoring the unfolding conflict in the Middle East, US trade policy and incoming data."
Since October the central bank has held its policy rate at the lower end of its neutral range. Inflation has remained close to the middle of the bank’s 1% to 3% control range for almost a year, giving the council some latitude in how quickly it moves on rates.
In their assessment, council members noted that inflationary pressures appeared muted overall and that they "could therefore take some time to see how the war in Iran evolved and what it meant for the outlook." At the same time, they recognized that an immediate energy price shock from the conflict would boost inflation in the near term, while its wider impact on the economy remained uncertain at this early stage.
Economic growth and the labour market have softened in recent months, the minutes said, pointing to trade uncertainty and a planned review of the United States-Mexico-Canada free trade agreement as contributing factors. Members judged the recent energy-driven price shock would lift inflation in the short run, but disagreed that the broader economic fallout was yet clear.
Money markets have responded to the shifting risk picture. Market pricing currently reflects the possibility of two rate hikes in the second half of the year following a public remark by President Donald Trump that the conflict could conclude in two to three weeks.
What this means
- The Bank of Canada is signaling a cautious, discretionary approach to policy as global events introduce near-term inflation volatility.
- Policymakers retain flexibility because headline inflation has been around the midpoint of the target range for an extended period.
- Near-term inflation risks are elevated by higher energy prices, while the broader economic impact of the conflict remains uncertain.