Canada Central Bank Faces Inflation, Economy Trade-off

The seven members of the central bank's governing council, led by Gov. Tiff Macklem, agreed to be patient in their response to the economic fallout from the war in Iran.

Prior to the conflict, data indicated weakness in the labor market and growth below the economy's potential. Officials noted flexibility because inflation was close to target and core measures suggested limited pressures, allowing time to assess the war's evolution and its implications for the outlook.

The council left its benchmark interest rate unchanged at 2.25% on March 18, but warned of painful economic repercussions from a prolonged and wider war in the Middle East. Traders on the overnight-index swap market now anticipate at least a 0.5% increase in Canadian rates, up from a 0.25% expectation before the policy announcement, reflecting elevated risks of higher inflation.

Gas prices in Canada are nearly one-third higher compared with a month ago, according to data collected by the Canadian Automobile Association. The minutes highlight a difficult trade-off: raising the policy rate to curb inflation could further weaken the economy, while lowering rates to support growth risks pushing inflation even higher.

The council is prepared to ensure price increases do not spread to other goods and services and become persistent inflation, relying on judgment and a risk management approach to monetary policy.