Canada’s central bank held its key lending rate at 2.25% today, but said it was “ready to respond” if the war in the Middle East caused inflation to surge.
The decision marked the third consecutive hold by the Bank of Canada, which has said it wants to keep rates steady while the future of US-Canada trade is clarified.
But the war in the Middle East triggered by US and Israeli strikes on Iran has injected fresh uncertainty into Canada’s economic outlook, including the prospect of elevated inflation caused by higher energy prices.
“The war in the Middle East has increased volatility in global energy prices and financial markets, and heightened the risks to the global economy,” the Bank of Canada said in a statement.
“The breadth and duration of the conflict, and hence its economic impacts, are highly uncertain,” it added.
For much of the past year, Canada’s central bank has cited US President Donald Trump’s trade policies as the main source of uncertainty for Canada’s economy.
US tariffs have suppressed Canadian growth, and raised unemployment in targeted sectors like auto, steel, aluminum and lumber.
Trump has threatened to scrap a North American free trade agreement which is due for revision talks this year and the Bank of Canada has warned that a collapse in free trade with the US could upend the economy.
The bank today detailed new risks from the Middle East conflict.
“In addition to energy supply disruptions, transportation bottlenecks stemming from the effective closure of the Strait of Hormuz could impact the supply of other commodities, such as fertilizer,” it said.
“As the outlook evolves, we stand ready to respond as needed,” it added.
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