Bank of Canada warns of possibly higher interest rates if inflation spike from Iran war persists
Bank of Canada Governor Tiff Macklem held the central bank’s key interest rate at 2.25% but warned he may have to hike the rate if Iran war-bred inflation persists.
Consumer Price Inflation will likely rise further in April to about 3%, Macklem said in a statement accompanying Wednesday’s rate-setting announcement.
Assuming oil prices decline, inflation will subside to the Bank’s 2% range by early 2027, Macklem said.
But higher interest rates may be on the way if the energy shock from the Middle East conflict continues.
“Governing Council is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation,” Macklem stated. “As the outlook evolves, we stand ready to respond as needed. The Bank is committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.”
Macklem has said recently that the uncertainty from U.S. tariff policy and now the Iran war has left the central bank in a tricky position. The BoC doesn’t want to weaken already slow economic growth by raising interest rates too soon but also has to ensure that it nips a burst of high inflation in the bud.
The Bank’s statement noted that, while CPI inflation climbed to 2.4% in March, core inflation was subdued.
“As expected, so far there is little evidence that oil prices have fed through more broadly to goods and services prices, but this warrants close attention in the months ahead,” Macklem said.
“Near-term inflation expectations have moved up with higher gasoline prices and still-elevated food price inflation, but longer-term inflation expectations have remained anchored,” he stated.
The Bank forecast GDP growth this year of 1.2% and 1.6% in 2027 – both slightly up from its January forecast. Macklem also released the BoC’s quarterly Monetary Policy Report.
