Energy sector investment, exchange rate factors in possible Bank of Canada rate hikes

OTTAWA — The Bank of Canada’s governing council says it’s weighing a range of different paths for its benchmark interest rate to cope with inflation risks from the Iran war.

On Wednesday, the central bank released the summary of deliberations that led to its decision to hold the policy rate steady for a fourth consecutive time in late April.

At the time, Bank of Canada governor Tiff Macklem was candid about the dilemma the Middle East conflict poses for monetary policy-makers.

If the war in Iran or tighter trade restrictions from the United States hamper the economy but inflation remains well contained, further cuts to the policy rate might be in order, he said. On the other hand, spreading cost pressures from the higher global price of oil could instead push the Bank of Canada toward consecutive rate hikes.

“Uncertainty is unusually elevated and there are many possible outcomes. Monetary policy may need to be nimble,” Macklem said in April.

Wednesday’s summary of deliberations largely repeated the scenarios Macklem laid out at the last rate decision, with a few additional details.

For instance, governing council indicated the degree of tightening needed in a higher inflation scenario would partly depend on the level of investment in the energy sector, as well as what happens to the Canadian dollar’s exchange rate with its U.S. counterpart.

The Bank of Canada’s six-member governing council is responsible for setting the benchmark interest rate and other high-level elements of monetary policy.

Future changes in monetary policy are expected to be small if the economy evolves roughly in line with the central bank’s latest forecast, which is based on the global price of oil declining to US$75 per barrel over the next year.

But the summary of deliberations notes that, between the war in Iran and the outcome of the upcoming Canada-U.S.-Mexico agreement review, there are many paths economic growth and inflation could take from here.

“There was a range of views on the probabilities related to the outcome of the CUSMA review and the war in the Middle East, and thus the most likely path forward for the policy interest rate,” the summary of deliberations read.

Macklem was asked in April what the central bank would do if Canada faced steeper tariffs and a sustained increase in global oil prices at the same time, but he would only offer a general answer.

“What we’re trying to convey is the direction and the rough magnitude of how we would respond given certain situations,” he said.

“Obviously, if it’s a combination, it’s going to be even more complicated. And we’ll have to weigh the various factors.”

The Bank of Canada’s next interest rate decision is set for June 10.

This report by The Canadian Press was first published May 13, 2026.

Craig Lord, The Canadian Press