Bank of Canada holds interest rate at 2.25%, warns of war-driven inflation

Experts warn the Iran war could cause inflationary pressures in Canada as the price of gas rises -- even after the Bank of Canada holds interest rates.

The Bank of Canada kept its key interest rate steady at 2.25 per cent on Tuesday, but Governor Tiff Macklem is warning Canadians that the escalating conflict in Iran is poised to drive up the cost of living from the gas pump to the grocery aisle.

While domestic inflation has hovered near the bank’s two per cent target for more than a year, Macklem noted that the geopolitical instability in the Middle East has sent oil prices “sharply higher.”

“Canada’s economy is dealing with a lot, and we now face more volatility,” Macklem said.

The ripple effect of rising oil

The central bank’s decision to hold rates is seen as an attempt to maintain stability amid global uncertainty.

However, energy experts say the reach of the conflict extends far beyond just the price of crude.

Robert Johnston, Director of Energy and Natural Resources at the University of Calgary’s School of Public Policy, said the refined products of a single barrel of oil — including gasoline, diesel, and jet fuel — touch almost every sector of the economy.

“The inflationary effects of all those things together can be significant,” Johnston said, noting that oil feedstocks are also essential to produce plastics, petrochemicals, and clothing.

In Calgary, the average price of gasoline currently sits at $1.65 per litre, according to GasBuddy.

Analysts warn that if the crisis persists into the summer high-demand season, prices could reach $2.00 per litre -- a reality already facing drivers in Vancouver.

Food prices

The pinch is also being felt at the grocery store checkout counter.

Michael von Massow, a food economist at the University of Guelph, said transportation costs typically account for 3.5 to four per cent of the retail price of food.

“An increase in freight costs will matter,” von Massow said. “We will probably see a point or two of inflation.”

For tropical produce, that transportation cost can skyrocket to 10 per cent of the shelf price.

Beyond fuel, farmers are grappling with rising fertilizer costs due to transportation bottlenecks caused by the closure of the Strait of Hormuz.

These increased production costs are expected to be passed down to consumers.

‘Absolutely insane’ costs

For many Calgarians, the cumulative effect of these price hikes is reaching a breaking point.

“The cost of living, like food, is insane. Absolutely insane,” said one Calgary resident, who noted they are considering leaving the country due to affordability.

Another resident said they are planning to sell one of their two vehicles just to maintain their quality of life. “It’s getting costly... just to be able to afford living comfortably every day.”

Bank of Canada

The Bank of Canada is scheduled to make its next interest rate decision on April 29, at which time it will release its latest Monetary Policy Report providing a more detailed economic outlook.