The Bank of Canada held its key interest rate at 2.25 per cent on Wednesday, as the bank seeks to balance economic turbulence while keeping inflation from rising too much.
The decision marks the central bank's fifth consecutive rate hold, as a number of factors have complicated the economic picture.
The central bank noted that the ongoing war in the Middle East, which has raised energy prices, has contributed to inflation, making life more expensive for Canadians.
But there has been "limited evidence" of high energy costs being passed through to consumer prices more broadly, according to the bank.
"Governing Council is continuing to look through the war’s near-term impact on headline inflation, but will not let higher energy prices become persistent inflation," the central bank said in its rate announcement.
During a news conference following the release, Bank of Canada governor Tiff Macklem said that the longer oil prices stay high, the more likely it is that those costs bleed into the general economy, which would require the bank to change rates in response.
Canada's overall inflation rate in April rose to 2.8 per cent, and Macklem added the bank expected it to hover around the three per cent mark before gradually easing toward the two per cent target.
Balancing risks
Although Canada's unemployment rate fell to a five-month low in May as hiring strengthened, Macklem said the figures have been volatile month to month, and there has been little net change in jobs since January.
And new tariff threats by the U.S. continue to weigh on the economy, he added.
General economic weakness and rising inflation create a tricky situation for the central bank. In his prepared remarks, Macklem said raising the interest rate to keep inflation at bay could cause further economic slowing, while lowering the rate could make inflation worse.
"For now, holding the policy rate unchanged balances those risks," he said.
That means the bank will be watching the key factors driving uncertainty and inflation — the trade war with the U.S. and the war in the Middle East, respectively — with a close eye, in case factors change that require rate moves in either direction.
