MNI BOC WATCH: Macklem Shifts Back To Say Rate Is Appropriate

The Bank of Canada held its key lending rate at 2.25% Wednesday as expected while reverting back to a view monetary policy is in the right place to balance the risk of oil inflation spreading against another potential export stall amid steep U.S. tariffs. 

"Governing Council judges the current policy rate remains appropriate to sustain the economic recovery and bring inflation back to the 2% target," according to a statement by Governor Tiff Macklem and his deputies. Officials are "prepared to adjust monetary policy as needed" to maintain confidence in price stability, the statement said. 

Gone from the decision were earlier comments about the potential for consecutive hikes if inflation spreads from the high oil prices caused by the Iran war, and a potential cut if there is major new damage from the U.S. trade conflict. (MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Officials on Wednesday said while they have been looking through the early inflation pickup from oil the risk of CPI sticking above the 2% target increases the longer energy prices are elevated. At the same time, the Bank said "the recovery in exports could stall" and that kind of weakness "would put more downward pressure on inflation."

Inflation will come in around 2.5% in the second half of the year and return to target early next year the Bank said based on its latest assumptions around crude oil futures. The decision also noted inflation excluding gasoline has been tame and core measures are seen remaining around 2%.

There are clear signs the economy is rebounding after GDP stalled in Q1 with the Bank lifting its Q2 forecast by a percentage point to 2.5% annualized. Weakness earlier this year led the Bank to cut 2026 growth to 0.7% from 1.2%. 

“Recent data suggest that the economy is evolving broadly in line with the outlook in the April Report, increasing confidence that households and businesses are navigating this period of global upheaval,” the Bank's economic forecast paper said. It will take time for slack in the economy to be absorbed, officials said. 

Canada's dollar has weakened lately and that should boost exports, the Bank said. The weaker currency can also add some inflation pressure by making imports more expensive.