The Bank of Canada remains steady, clearly "seeing through" the short-term oil price shock and focusing on the risks of economic downturn

On March 18, the Bank of Canada announced that it would maintain interest rates, clearly stating that it would "look through" the short-term impact of the Middle East conflict on inflation, while anchoring its policy focus on the downside risks to economic growth.

The decision-making committee led by Governor Tiff Macklem kept the policy interest rate at 2.25%, in line with market expectations and the predictions of most economists in a Bloomberg survey. The central bank stated in its announcement that the economic impact of the Middle East conflict is "highly uncertain," making it impossible to predict its duration and scale. Meanwhile, the central bank removed the wording from the January statement that "the current policy interest rate remains appropriate," instead indicating that it is "prepared to respond as needed," reflecting a more flexible stance.

Macklem stated that due to ongoing trade frictions leading to excess supply in the economy, the upside risks to inflation in Canada are expected to be restrained, with current inflation close to the central bank's 2% target. Following the interest rate decision announcement, the Canadian dollar continued to decline, falling 0.2% against the US dollar during the day.

Downside Growth Risks, Employment Data Alarm

Although rising oil prices will temporarily push up inflation, the central bank clearly pointed out that "growth risks are tilted to the downside," supported by a series of weaker-than-expected economic data.

In terms of the labor market, Canada's employment fell by 83,900 in February, marking the largest monthly decline in four years, with the unemployment rate rising to 6.7%. Meanwhile, the economy also faces multiple headwinds such as slowing population growth and the impact of trade wars, leading to an annualized GDP contraction of 0.6% in the fourth quarter.

Macklem stated that while rising oil prices will "boost energy export revenues," higher gasoline prices will also "compress consumers' disposable income, reducing spending in other consumption areas," limiting the actual boosting effect.

The Double-Edged Sword Effect of Oil Price Shocks

As the largest foreign supplier of crude oil to the United States, Canada's sensitivity to oil price fluctuations differs from that of other economies. If oil prices continue to rise and are sustained, they will bring considerable revenue to the governments and businesses in energy-rich provinces; however, the chain reactions cannot be ignored.

Macklem warned that the Middle East conflict has led to tightening global financial conditions—global bond yields rising, stock markets falling, and credit spreads widening. He also specifically mentioned that transportation bottlenecks in the Strait of Hormuz "could affect the supply of other commodities such as fertilizers," with potential spillover effects worth noting.

Market and Economists: Clearly Dovish Tone

Several market analysts believe that the dovish tone of the central bank's statement is more pronounced than market pricing suggests.

Benjamin Reitzes, a rate and macro strategist at the Bank of Montreal, stated in an email: "The tone of the policy statement is dovish, especially relative to market pricing. The policy will remain unchanged until more information is obtained regarding the duration and scale of the energy price shock. Without this conflict, the central bank would clearly be more concerned about the outlook, and its stance would have been more dovish."

Jason Daw, head of North American rate strategy at RBC Capital Markets, stated on BNN Bloomberg: "The outlook had already become unclear weeks ago, and the emergence of oil price issues has made it even more perplexing. All of this indicates that the central bank will maintain its policy unchanged for a longer period while digesting the relevant information Avery Shenfeld, Chief Economist at the Canadian Imperial Bank of Commerce, wrote in a report to investors that the central bank "has not given any indication that there was any discussion of interest rate cuts or hikes at this meeting," which is consistent with the central bank's stance— the impact of energy price shocks critically depends on their duration, and this "is currently impossible to predict."

Holding Steady May Not Last Long

Although this decision aligns with expectations, some economists warn that the window for maintaining interest rates may not be long.

Andrew DiCapua, Chief Economist at the Canadian Chamber of Commerce, stated in an email: "The Bank of Canada may be holding steady, but this position may not last long. Although rising oil prices are putting real cost pressure on Canadians, inflation risks remain relatively low. The Governor acknowledged the asymmetric trade-offs that high oil prices pose to the Canadian economy."