By Paul Vieira
OTTAWA--Bank of Canada officials agreed on the need to change course quickly on rate policy depending on developments in the Middle East and trade tensions with the U.S., according to minutes of the latest central-bank deliberations.
For now, central policymakers agreed they could exhibit patience and leave the main interest rate unchanged despite the initial shock in gas prices stemming from the U.S.-Iran conflict.
"The situation could change quickly, and monetary policy might need to respond to guard against the risk that inflation broadens and becomes more persistent," said the minutes, which cover the six-member governing council's deliberations that started on April 21.
Eight days later, the central bank said it left its target for the overnight rate unchanged at 2.25%, adding that it anticipated little change in the rate level so long as the economy evolved as forecast.
That forecast assumed no changes in the level and magnitude of tariffs imposed by the Trump administration on Canadian goods. Further, the Bank of Canada assumes that inflation would peak in April at about 3%, and that crude-oil prices ease toward the $75 a barrel level by mid-2027.
According to minutes, central bank officials acknowledged there was "considerable uncertainty" regarding their assumptions.
In keeping the policy rate unchanged, Gov. Tiff Macklem said the central bank might have to cut in the event that President Trump imposes new trade restrictions on Canada. There is a risk a U.S.-led review of existing U.S.-Mexico-Canada trade treaty could collapse, given recent tensions between Ottawa and Washington over tariff policy.
Macklem also said that consecutive rate increases might be necessary should oil prices stay elevated for a prolonged period, as that would increase the risk that higher fuel costs would spread to other non-energy goods and services.
In this scenario, "the degree of tightening would depend on other related developments including investment in the energy sector and the response of the exchange rate," the minutes said.
According to the minutes, central bank officials agreed that businesses would initially have difficulty passing along higher costs to customers due to the weakness in the labor market and excess spare capacity in the economy.
However, "members acknowledged that there could be less excess supply than assessed," the minutes said. "Furthermore, having recently experienced a large inflation surge, Canadians could be more sensitive to price changes and inflation expectations could shift more quickly. Businesses could also pass on higher costs more rapidly."
Macklem has previously said the central bank would focus on longer-term inflation expectations--and those remain well anchored at this time, according to the minutes.
Competing uncertainties in the Middle East and on trade policy meant that central bank officials had to consider myriad possibilities and how that might affect the rate outlook, the minutes said.
"Members recognized that the actual outcome could reflect a combination of these two shocks as well as other developments," the minutes said. "Members agreed to watch developments closely and assess their implications for growth and inflation," the minutes said.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
05-13-26 1354ET
