Bank of Canada holds interest rate steady, signals possible increase amid ongoing energy crisis

Thank you, Rebecca, and good morning, everyone. I'm very pleased to be here with the Senior Deputy Governor Carolyn Rogers to discuss the monetary policy report and today's decision. Governing Council maintained the policy interest rate at 2 and 1/4%. We've held the policy rate at this level since last October. We have three key messages today. First, Canada is being buffeted by global events and geopolitical uncertainties, but our economy is growing and we expect it to continue to grow. Second, after more than a year with inflation close to the 2% target, higher global energy prices are pushing inflation up. The surge in gasoline prices, combined with still elevated food price inflation, is squeezing more Canadians. And third, monetary policy is focused on ensuring that the jump in energy prices does not turn into persistent inflation while helping the economy adjust to global headwinds. We are committed to keeping inflation low and stable over time.

We have three key messages. First, Canada is being buffeted by global events and geopolitical uncertainties, but our economy is growing and is expected to continue to grow. Second, after more than a year with inflation close to the 2% target, higher global energy prices are pushing inflation up. The surge in gasoline prices, combined with still elevated food price inflation, is squeezing more Canadians. And third, monetary policy is focused on ensuring that the jump in energy prices does not turn into persistent inflation while helping the economy to adjust to global headwinds. We are committed to keeping inflation low and stable over time.

Let me expand on the economic outlook, the risks, and the implications for monetary policy. Since our previous forecast in January, the war in the Middle East has sent global energy prices sharply higher, increased financial market volatility, and disrupted shipping for fertilizer and other commodities. This has lowered the outlook for global growth while boosting inflation. In Canada, growth looks to have resumed after contracting at the end of 2025. Consumer and government spending are contributing to growth while US tariffs and trade uncertainty are weighing on exports and business investment. The labor market is soft with the unemployment rate remaining in the 6 and 1/2 to 7% range, reflecting both weak hiring and fewer job seekers.

Our forecast for GDP growth in Canada has not changed significantly since our January projection. The conflict in the Middle East will affect the composition of growth, but the impact on overall growth is expected to be small because higher global oil prices will increase the value of our energy exports even as they squeeze consumers and many businesses. In our forecast today, the Bank of Canada projects the economy will expand 1.2% in 2026, 1.6% in 2027, and 1.7% in 2028 as the growth in exports and business investment gradually resumes. With GDP growth slightly above potential, the current excess supply in the economy is slowly absorbed.

Until the war, we expected inflation to stay close to the 2% target. But sharply higher gasoline prices are now pushing up inflation. CPI inflation rose from 1.8% in February to 2.4% in March. Core inflation has been easing and held steady just above 2% in March. The proportion of the components of the CPI basket rising faster than 3% has also declined in recent months. So far, there is little evidence that higher oil prices have fed through to other goods and services prices more broadly. But, it is early days and we will be watching this closely. We will also be closely monitoring inflation expectations. Near-term inflation expectations have moved up with higher gasoline prices and still elevated food price inflation, but longer-term inflation expectations remain anchored.

Based on recent market expectations, oil prices are assumed to decline from an average of about $90 a barrel in the second quarter to about $75 a barrel by the middle of next year. If that happens, inflation should peak around 3% in April and then ease back to the 2% target by early next year. The Bank of Canada is committed to keeping inflation close to the 2% target over time. The monetary policy needed to achieve this will depend importantly on what happens with the Canada-US-Mexico trade agreement, how the conflict in the Middle East evolves, and the impacts of US tariffs and energy prices on our economy.

At our meeting this week, we decided to maintain the policy rate at 2.25%. Governing Council agreed to look through the war's immediate impact on inflation, but if energy prices stay high, we will not let their effects become persistent inflation. Our baseline forecast assumes that oil prices will come down and US tariffs will remain at the current levels. If this holds true, a policy rate close to current settings looks appropriate to support adjustment in the economy and return inflation to the target. There may still be a need to adjust the policy rate depending on how the risks evolve. But if the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small. However, uncertainty is unusually elevated and there are many possible outcomes. Monetary policy may need to be nimble.

At our meeting this week, we decided to maintain the policy rate at 2 and 1/4%. Governing Council agreed to look through the war's immediate impact on inflation, but if energy prices stay high, we will not let their effects become persistent inflation. Our baseline forecast assumes oil prices will come down and US tariffs will remain at current levels. If this holds true, a policy rate close to the current setting looks appropriate to support the adjustment in the economy and return inflation to target. There may still be a need to adjust the policy rate depending on how risks evolve, but if the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small. However, uncertainty is unusually elevated and there are many possible outcomes. Monetary policy may need to be nimble.

If the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth. Alternatively, if oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing inflation increases. And if this starts to happen, monetary policy will have more work to do. There may be a need for consecutive increases in the policy interest rate. Of course, these are not the only possible outcomes. We'll be watching developments closely and assessing their implications for growth and inflation. As the outlook evolves, we stand ready to respond as needed. The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. And with that, the Senior Deputy Governor and I would be very pleased to take your questions.

Well, first of all, we know higher oil prices are hitting Canadians. They're hitting businesses, they're hitting consumers. We've all gone to the gas station and filled up our tank. That's against a background where food price inflation has been running high for a number of months now. These price increases reflect global events. The best thing that could happen would be that these price increases go away at the source, but that's not something we can control. What can we control? We can ensure that these price increases, particularly the surge in gasoline prices and other fuel prices, doesn't spread, become generalized, persistent inflation. Maintaining the policy rate today where it is was the right thing to do for today. And, as we've indicated, if things evolve broadly in line with the outlook we've presented, and in particular oil prices come down broadly in line with the futures curve, something close to the policy rate that we have today is probably about right. We might need a small adjustment, but I think it'd be reasonable to expect small. But, particularly if energy prices go higher and particularly if they stay higher for longer, there could well be a need to increase the policy rate to get inflation back to 2%. And really the message is we're committed to ensuring that inflation does stay close to 2% over time.

Well, let me put it in the broader context, Kevin. There's a few things affecting potential output, and once a year, as you know, we do a comprehensive review of our assessment of potential output and the outlook for potential going forward, and that is, we do that each year in the April Monetary Policy Report, so there is a pretty detailed appendix on that in the report. Look, there are I would say three key things affecting potential in the outlook. Population growth is historically very low. There's basically in our outlook, there's almost no population growth. So, that means that we're not adding new workers, new consumers to the economy, so that lowers potential output going forward. The second factor is, and we've talked about this quite extensively in the last report and in some previous speeches, the Canadian economy is going through a structural adjustment. Our trade relationship with the United States is fundamentally changed. Businesses are adjusting to that. And through that adjustment, that will weigh on productivity growth. Once you come out at the other side, things will be better, but there is a period of adjustment. So, those two things are weighing on potential output growth, particularly in the near term. The third factor, which what you mentioned is AI, and there's no doubt that AI is a transformative technology, and as it gets adopted by more and more businesses, and as they use it in their businesses, we do expect to see labor productivity growth pick up. And so, that we have built in a modest increase from AI in productivity growth going forward. It builds over time. I think on average, it's adding about 0.2 to productivity growth in the projection. So, taking those three things together, potential output growth is fairly weak in the near term, but as the restructuring advances and as the effects of AI accumulate, productivity growth picks up going forward. So, that's built into our projection. Is AI having a big effect on our policy decision right now? No, but it is built into our projection, and it could end up that AI comes faster, has a bigger effect than we've expected, it might take longer. We'll see. That's something we'll be assessing going forward.

Look, you know, I provided a couple of examples, and I think, you know, the reason I provided those two examples is, those are very salient assumptions in our projection around which, frankly, there is a lot of uncertainty. And it's not the regular kind of economic uncertainty. These are geopolitical events. So, it's hard to assess probabilities as to exactly what's going to happen. And yes, as we outlined, the message really is that, look, today, the best decision is to maintain, but monetary policy, the situation could change. Monetary policy may need to be nimble. And yeah, we provided a couple of examples. If there's significant new trade restrictions on Canada, that could have a material impact on the Canadian economy, we may need to cut to support growth. If oil prices go up, and particularly if they stay up, the risk that inflation becomes more persistent goes up, and there may need to be increases in the policy rate, and as we indicated, probably more than one consecutive increases. Those are not the only things that could happen. To give you another example, financial markets have been very resilient through this. We could see an abrupt repricing in financial markets. That would be another kind of shock that we would need to take into account. And as you indicated, the reality is more than one thing, there's many combinations of these things that could happen. In laying out those two examples, and in particular in showing the alternative case in the MPR with a permanently higher oil price, what we're trying to convey is the sort of the direction and the rough magnitude of how we would respond given certain, you know, given some different possible situations. Obviously, if it's a combination, it's going to be even more complicated, and we'll have to weigh various factors. The point of laying out these alternatives is really to give a sense of how we would likely react in certain situations.

Look, obviously, the higher oil prices go and the longer they're higher, the more likely it is that we'll have to raise rates to bring inflation back to target. But, I want to stress, there is no set timeline here. It really depends on the conditions. It's going to depend, importantly, on yes, what oil prices do, what we think they're going to do going forward. It's all going to depend on what we see. How much are higher oil prices spilling into the prices of other goods and services? How much is our outlook for inflation changing? Is that substantially increasing the persistence of inflation? So, it's going to depend on those conditions. What I would stress is it's about the shock itself and it's about the propagation of the shock. And if we're in a situation where the shock's bigger and particularly it's more persistent and we see clear evidence, we see growing evidence of propagation, that would be a clear signal that yes, rates probably do need to go higher to get inflation back to target.

Well, look. I would emphasize that there was a clear consensus on the governing council that the best thing to do today is maintain the policy interest rate where it is. But, I will stress that there is no risk-free path for the policy interest rate. If we had raised rates now, and then oil prices come down in line with what the market's expecting, by the time those higher interest rates are impacting the economy, they wouldn't be needed and we'd wish we hadn't raised the policy interest rate. But, look, if oil prices stay high and we hold rates, we maintain for too long, yeah, we could see higher energy prices spread to other prices of other goods and services and start to become more persistent inflation. And yeah, in that case, we'd probably wish that we'd raised rates earlier. So, we've got to manage both those risks, Greg. And as I said, I think there was a clear consensus that right now, the best thing to do is maintain. But let me add two additional points of context. First of all, the current context is we're starting from a situation where inflation has been close to target for roughly a year and a half now. We're also starting in an economy where there's some slack. You can see it in the labor market. Our estimate of the output gap is around minus 1%. So, we're starting with some slack. So, in that context, we don't think higher energy prices are going to be rapidly passed through to the prices of other goods and services because when there's some slack in the economy, when the labor market is soft, businesses are cautious about passing on price increases. They're worried about losing clients. So, we don't expect it'll be rapid. I think you're clearly going to see it in some places. You're already seeing fuel surcharges in some places. But we're not expecting it to rapidly broaden. But, that's something that needs close monitoring. The other thing I would stress is that we know uncertainty's high and we recognize that monetary policy may need to be nimble. If the situation changes, we may need to change course. And as I've said a couple of times, if oil prices go higher and particularly if they stay higher for longer, that will increase the risk that inflation generalizes and becomes more persistent. And in that case, yes, we may well need consecutive increases in the policy rate to get inflation back to the 2% target.