Bank of Canada holds policy rate at 2.25%, cites risks

The Bank of Canada's Governing Council maintained the policy interest rate at 2.25%.

This decision reflects a complex global and domestic economic landscape.

Since April, the Middle East conflict has intensified, driving higher energy prices and global supply chain disruptions that are pushing up inflation worldwide.

US trade policy uncertainty also remains elevated due to proposed new tariffs.

Domestically, the Canadian economy has remained soft, with GDP edging down 0.1% in the first quarter, weaker than expected.

Consumer spending grew by 1.4%, but housing activity declined and business investment remained weak.

The labour market strengthened in May, with the unemployment rate falling to 6.6%, though employment has shown little change since the start of the year.

CPI inflation rose to 2.8% in April, largely reflecting energy prices.

Core inflation measures have moved down to around 2%.

The Bank expects CPI inflation to hover close to 3% in coming months before gradually easing toward 2%.

The interplay of economic weakness and rising inflation creates a monetary policy dilemma.

Raising rates to curb inflation risks further slowing the economy, while easing rates to support growth could entrench higher inflation.

Holding the policy rate unchanged currently balances these immediate risks.

However, uncertainty is unusually elevated, and risks could shift, demanding a nimble response.

The Bank outlined two key conditional scenarios: a policy rate cut if new US trade restrictions impact Canada's growth, or consecutive rate increases if persistent energy prices lead to generalized inflation.

The Bank remains committed to ensuring price stability for Canadians through this period of global upheaval.