The Bank of Canada again held its key interest rate at 2.25 per cent on Wednesday in a decision that provided little in the way of new information or an updated evaluation of the rapidly changing global economic environment due to the war in Iran.
Elevated uncertainty and financial market volatility at this juncture are such that the Bank of Canada does not have sufficient information that warrants a policy change in either direction.
Like other central banks, the Bank of Canada will simply look through the real-time increase in inflation and await clarification on the direction and duration of the conflict.
But should the conflict persist into the second half of the year and supply remained constrained, policymakers will not have the luxury of looking through inflationary pressures for long.
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We expect the Bank of Canada will need to map out its likely policy path at its next meeting on June 10 given the risks to the country’s economic outlook.
Canada’s economy remains on a path that reflects an underutilization of capacity and an unacceptably elevated rate of unemployment. Policymakers will need to tread carefully going forward and prepare both the public and investors for what is looking like an increasingly mean year.
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