The Bank of Canada held its key interest rate at 2.25 per cent today, even as it warned that inflation risks have increased.
The central bank also kept the Bank Rate at 2.5 per cent and the deposit rate at 2.20 per cent.
The decision marks another hold from the Bank of Canada, which has kept its policy rate unchanged as the economy deals with high energy prices, renewed trade tensions and uncertainty from US tariffs.
The bank said the continuing conflict in the Middle East is keeping energy prices high.
It also said new US tariffs and Canadian countermeasures have been announced after the breakdown of trade talks between Canada and the United States.
“Both situations remain fluid,” the bank said.
The central bank said the global economy has shown resilience in the face of geopolitical headwinds, with growth broadly in line with its July Monetary Policy Report.
However, it said inflation remains high in most countries because of still-high oil prices and elevated margins for refined energy products.
It explained: "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. New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time."
In Canada, the bank said economic activity strengthened in the second quarter, with GDP up 3.3 per cent after very weak growth in the first quarter.
It said some of that strength reflected temporary factors, but the pickup was broad-based.
Consumption posted solid gains, housing activity rebounded after several weak quarters, and exports and business investment rose sharply.
The labour market has also improved in recent months, with the unemployment rate edging down to 6.4 per cent in July.
However, the bank said demand for labour remains subdued and indicators continue to point to excess supply in the economy.
The Bank of Canada said recent data support its view that Canada’s economic recovery is broadening.
But it warned that uncertainty remains high and new US tariffs, along with threats of further action, pose risks to the sustainability of the recovery.
Inflation has hovered around three per cent in recent months, mainly because of persistently higher gasoline prices.
The bank said there has so far been little evidence that higher energy prices are spreading to other parts of inflation.
Excluding gasoline, inflation was 2.2 per cent in July, while measures of core inflation remained close to two per cent.
However, the bank said upside risks to its inflation forecast have increased because the Middle East conflict is ongoing and there has been little progress reopening the Strait of Hormuz.
It said the longer high oil prices and elevated refinery margins persist, the greater the risk that they spill over into prices for other goods and services.
The bank also said new US tariffs and Canadian counter-tariffs will raise costs for some businesses and could eventually feed into consumer prices.
The Bank of Canada said governing council agreed to leave the policy rate unchanged because the economy and inflation are evolving broadly as forecast in its July report.
However, it said it will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy if needed.
The next scheduled interest rate decision is Oct. 28, when the bank will also release its next Monetary Policy Report.
