BoC's Macklem: It is too early to assess the impact of the war on growth. Governing Council will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation.

Middle East/USMCA

• With inflation close to target and the economy in excess supply, the risk that higher energy prices quickly spread to the prices of other goods and services looks contained. But the longer this conflict lasts and the wider it gets, the bigger the risks. Governing Council will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation.
• Economic weakness combined with rising inflation is a dilemma for central banks. Raising interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target. Canada’s outlook is further complicated by structural change—shifting trade relationships, the adoption of AI, and changes in demographics.
• Relative to our January forecast, risks to economic growth are tilted to the downside. Near-term growth looks weaker than expected and the review of the Canada-United States-Mexico Agreement is a big unknown. At the same time, risks to inflation are tilted to the upside, because of the sharp increase in energy prices.
• It is too early to assess the impact of the war on growth in Canada

Other

• Recent data show the Canadian economy remains in excess supply and is growing slowly as it adjusts to US tariffs and uncertainty.

The BoC's Macklem indicates a cautious stance on the war's immediate impacts, asserting that while current inflation risks remain manageable, persistent high energy prices could shift this dynamic. The emphasis on balancing growth and inflation suggests the BoC may be hesitant to take aggressive rate actions, as rising energy costs could complicate the economic outlook considerably. This guidance may lead to volatility in CAD and influence fixed income markets as traders adjust expectations for future monetary policy.