The Bank of Canada left its rate unchanged — inflation growth risks have intensified

The Bank of Canada kept its monetary policy rate unchanged at 2.25% on Wednesday. The decision was influenced, on one hand, by the strengthening of the country's economy, and on the other hand, by inflationary risks stemming from high oil prices and heightened uncertainty surrounding trade relations with the US.

The central bank left the target for the overnight rate at 2.25%, kept the Bank Rate at 2.50%, and maintained the deposit rate at 2.20%. The decision was in line with the forecast published in July, though policymakers warned that inflation risks have increased, and new tariffs imposed by the US have made the outlook for economic growth more uncertain.

Canada's economy rebounded sharply in the second quarter following weak indicators at the start of the year. The recovery was broad-based across several areas of the economy, including consumer spending, the residential real estate sector, exports, and business investment.

The unemployment rate also declined slightly in July, though the Bank of Canada noted that demand in the labor market remains weak and the economy still has excess capacity, indicating that economic resources are not being fully utilized.

Inflation remains the bank's main risk

According to the Bank of Canada, inflation has fluctuated around 3% in recent months, driven mainly by a prolonged rise in gasoline prices.

Excluding gasoline prices, the inflation rate stood at 2.2% in July, while the core inflation measures used by the central bank to assess the underlying inflation trend remained close to around 2%.

The bank assessed that the upside risks to the inflation outlook have intensified further amid the ongoing conflict in the Middle East and the lack of progress toward fully reopening the Strait of Hormuz.

"With the conflict in the Middle East continuing and little progress toward reopening the Strait of Hormuz, the upside risks to the bank's inflation outlook have increased," the Bank of Canada stated.

Thus, the central bank is currently trying to maintain a balance: on one hand, the improvement in economic growth reduces the need for a rate cut, while on the other hand, rising energy costs, trade uncertainty, and inflation risks call for a more cautious monetary policy.