The Bank of Canada maintains interest rates unchanged for the fifth consecutive time, Governor Macklem issues rare warning: future may require consecutive rate hikes.

The Bank of Canada announced on Wednesday that it will maintain its benchmark interest rate at 2.25%, in line with market expectations. This is also the fifth consecutive time that the Bank of Canada has chosen to stay put. However, while announcing the interest rate decision, Bank of Canada Governor Macklem issued a rare warning that if the Middle East situation continues to push up energy prices, further driving overall inflation, Canada may need to raise interest rates continuously in the future. The Bank of Canada stated in its announcement that current economic growth is weak, but inflation still faces upward pressure, especially as uncertainties in U.S. trade policy and rising oil prices due to the Iran conflict are presenting a dilemma for monetary policy. Macklem stated in his speech, "The occurrence of weak economic growth and rising inflation at the same time presents a dilemma for monetary policy. Raising interest rates can help curb inflation, but may further weigh on the economy; lowering rates can support economic growth, but also increase the risk of high inflation persisting." He emphasized that maintaining the interest rate unchanged is the best choice to balance these risks for the time being. However, Macklem stressed that the Bank of Canada will need to remain flexible in the future and adjust its policy direction in a timely manner based on changing economic conditions. He reiterated that if the U.S. were to implement "significant new trade restrictions" in the future, it could impact Canadian economic growth, and the central bank may need to cut rates to support economic activity. Meanwhile, if the Middle East conflict continues to keep energy prices elevated for an extended period, gradually transmitting to commodity and service prices, leading to broader inflationary pressures, the Bank of Canada may be compelled to take stricter policy measures. Macklem stated, "In such a scenario, monetary policy may need to take more action, even potentially requiring successive increases in policy rates." Market analysts pointed out that the Bank of Canada has specifically kept the phrase "continuous rate hikes" in reserve for this time, indicating that it remains highly vigilant of potential inflation risks. Senior Economist at the Imperial Bank of Commerce, Andrew Grantham, stated that the Bank continues to emphasize the possibility of "continuous rate hikes," suggesting that it believes the risk of upward inflation currently outweighs the risk of economic downturn. However, he also pointed out that, overall, the Bank of Canada still displays a strong patience and is more inclined to observe the development of economic data in the coming months before deciding on the next steps. Regarding inflation, the Bank of Canada stated that there are currently no clear signs of energy price increases spreading broadly to other goods and services prices. But Macklem pointed out that due to the ongoing Iran conflict, international oil prices remain significantly higher than the levels forecasted in the Bank's April monetary policy report, with the current price per barrel of crude oil approximately $10 higher. In this context, the Bank of Canada expects that the Canadian Consumer Price Index (CPI) increase will stay close to 3% in the coming months, before gradually falling back to the target range of 2%. Data shows that Canada's inflation rate was 2.8% in April, although higher than the Bank's target level, it was still lower than market expectations. Meanwhile, the core inflation index, excluding volatile items, decreased slightly, indicating that underlying inflation pressures are still manageable. In terms of economic growth, recent data in Canada has shown weakness. Data released by Statistics Canada showed that the country's Gross Domestic Product (GDP) shrank by 0.1% on an annualized basis in the first quarter of this year, following a 1% contraction in the fourth quarter, meaning the economy experienced negative growth for two consecutive quarters. Although some market observers refer to this as a "technical recession," the Bank of Canada believes that the economy is expected to rebound in the second quarter, but there is still excess capacity in the overall economy and the issue of inadequate demand has not been fully resolved. Chief Economist at the Canadian Chamber of Commerce, Andrew DiCapua, stated that the Bank of Canada is currently trying to strike a balance between controlling market panic and maintaining policy flexibility, but this balance will become increasingly difficult in the future. He pointed out that faced with challenges such as trade uncertainty, slowing consumer spending, and weak business investment, the Canadian economy still faces significant downward pressure, and therefore, the option of rate cuts in the future should not be completely ruled out. Following the interest rate decision, the Canadian dollar against the U.S. dollar exchange rate remained stable, rising by about 0.2% on the day to 1 USD to 1.3925 CAD. The yield on the two-year Canadian government bond fell slightly by about 2 basis points to 2.83%. It is widely believed in the market that the Bank of Canada is currently in a wait-and-see mode. In the coming months, the trends in oil prices, changes in U.S. trade policy, and the performance of Canadian inflation data will be key factors determining the central bank's next steps.