Monetary policy-makers at the Bank of Canada are relying more heavily on their own reasoning to chart a course for the policy interest rate through conflicting economic signals tied to the war in the Middle East.
A summary of deliberations from the Bank of Canada governing council’s decision to hold the policy rate steady at 2.25% on March 18 was released Wednesday.
The report shows council members debated the best course of action for monetary policy with spiking energy prices set to fuel a rise in inflation at the same time as Canada’s economy underperforms.
The risk of rising inflation usually calls for an increase in the policy rate, while sluggish economic growth typically pushes the central bank toward rate cuts.
Bank of Canada governor Tiff Macklem said at the rate decision last month that this puts the central bank in a “dilemma,” unsure of which direction to take the key rate next.
Governing council expressed some concern in the deliberations about inflation expectations rising with higher gas costs and stubborn price hikes at the grocery store coming so soon after the post-pandemic inflationary period.
But members also noted that a weaker economy might limit the ability for corporations to pass higher costs from the oil supply shock on to customers, which could limit the overall rise in inflation.
Given that inflation was showing signs of stability ahead of the Middle East conflict, governing council members decided they had “some flexibility” to wait and see how long the Iran war would last before deciding whether to adjust interest rates.
Macklem said last month that the Bank of Canada was willing to look through a short-term spike in inflation tied to surging gasoline prices, but the central bank would be prepared to act if there were signs inflationary pressures were spreading beyond gas pumps.
The deliberations said the central bank’s decision-makers “would need to rely on judgment more heavily than usual and take a risk management approach to monetary policy.”
Iran is not the only source of uncertainty for the central bank — the Bank of Canada is also watching the upcoming review of the Canada-U.S.-Mexico agreement on trade to gauge needs for tighter or looser monetary policy.
The governing council agreed in March to “keep options open while closely monitoring the unfolding conflict in the Middle East, U.S. trade policy and incoming data,” the deliberations said.
Economists widely expect the Bank of Canada to hold its policy rate steady again at its next interest rate decision on April 29. The central bank will release updated forecasts for inflation and the economy at the same time.