The Bank of Canada held its benchmark interest rate steady at 2.25 per cent on Wednesday, marking the seventh consecutive decision to keep the policy rate unchanged. The move was widely expected by economists, as the central bank has remained on the sidelines since late last year.

In prepared remarks, Bank of Canada Governor Tiff Macklem said the persistence of the Middle East conflict has increased inflationary risks, with global energy prices continuing to float higher. He also noted that a re-escalation in the trade dispute with the United States threatens Canada's economic rebound, and that renewed uncertainty might lead businesses to delay investment and hiring decisions until the trade picture crystallizes.

"Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don't jeopardize price stability in Canada," Macklem said.

The decision comes as inflation rose to three per cent in July, driven by a volatile period for gas prices following the war in Iran. The consumer price index has been volatile since the Middle East conflict sent gas prices soaring over the spring. Excluding energy, inflation stood at 2.2 per cent, according to an analysis in The Globe and Mail.

Economic growth has shown signs of rebounding after stagnating for much of the last year. The economy expanded at a 3.3 per cent annualized rate in the second quarter, as reported by several outlets including BayToday and The Globe and Mail. Statistics Canada published its estimate of second-quarter GDP growth on Aug. 28, which showed a stronger-than-expected rebound, with first-quarter growth revised from a contraction to an increase. Consumption rose 3.3 per cent and exports rose 14.3 per cent in the second quarter, according to The Globe and Mail.

However, the trade front has darkened. The United States imposed 50 per cent tariffs on a range of Canadian goods on Aug. 22, and Canadian negotiators walked away from trade talks a day earlier. Prime Minister Mark Carney announced dollar-for-dollar retaliatory tariffs effective Sept. 8. Macklem said the Bank of Canada does not expect a "large direct impact" on the economy from the new duties, though targeted sectors could be hit hard, and that counter-tariffs could increase costs for Canadian businesses, posing an inflation risk if higher prices are passed on to consumers.

In their analysis for The Globe and Mail, Jeremy Kronick, president and chief executive of the D. Howe Institute, and Steve Ambler, emeritus professor of economics at Université du Québec à Montréal and the David Dodge Chair in Monetary Policy, argued that the trade breakdown left the bank with "little choice" but to hold. They noted that without trade developments, the economic data could have pointed toward a hike, given the strong second-quarter growth and inflation near the top of the bank's control range.

Economists See Prolonged Hold

Private-sector economists widely expect the hold to continue. Stephen Brown, chief North America economist at Capital Economics, said the central bank will likely need to see further signs of improvement in the unemployment rate or economic growth before raising the policy rate. He added that a rate hike at the bank's final meeting of the year in December is now on the table.

KPMG chief economist Ali Jaffery said he expects the bank to be less worried about inflation given the sharp risks for lower growth, and maintained his call for the Bank of Canada to stay on hold through the end of 2027.

CIBC chief economist Avery Shenfeld said it was no surprise the central bank left its key rate unchanged "amidst the fog of a trade war," and that CIBC sees "little prospect" for any change in the policy rate this year.

Macklem said, "Overall, the data reaffirm our view of a broadening recovery," and that the governing council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed.

Rate Decision Process Affected by Strike

An ongoing strike among the Bank of Canada's security officers is once again preventing the central bank from holding its customary lockup with journalists before releasing the rate decision, as reported by BNN Bloomberg and CP24.

The Bank of Canada uses the policy rate to keep a lid on inflation and support economic growth when prices are contained. With the rate hold now in place for seven consecutive decisions, attention turns to how the evolving trade and energy situations will influence the central bank's next move.