The Bank of Canada held its key overnight interest rate at 2.25 per cent Wednesday, as largely expected by economists, with the Middle East conflict and trade tensions driving economic uncertainty.

The decision to hold pat for now — the third pause in a row — was expected despite fears of

rising inflation driven by soaring oil prices after the United States and Israel launched attacks on Iran.

The Bank of Canada said it’s not clear yet whether the energy shock will prove to be short-lived, which could be absorbed by the economy, or whether it will persist and spread to other sectors.

However, governor Tiff Macklem said the central bank is prepared to change course if it appears inflation is becoming broader-based and stickier.

“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,” he said while announcing the rate hold. “But the longer this conflict lasts and the wider it gets, the bigger the risks. If energy prices stay high, we will not let their effects broaden and become persistent inflation.”

Macklem said transportation bottlenecks stemming from the effective closure of the

Strait of Hormuz could also impact the global supply of other commodities. “Uncertainty is acute,” he said, adding that it is too early to assess the impact of the war on growth in Canada, but the economic outlook appears weaker than just a few months ago due to factors such as trade tensions and a soft jobs report.

“We continue to expect the Canadian economy to grow modestly as it adjusts to U.S. tariffs and trade policy uncertainty, but recent data suggests that near-term economic growth will be weaker than anticipated in January,” he said.

Food inflation also remains a problem despite slowing in February, but that’s not the only inflation concern for the central bank.

“The recent sharp increase in global energy prices is causing higher prices at the pump, as we’ve all seen, and this will push inflation up in coming months,” he said.

Higher oil prices will leave consumers with less income for other spending, but it will also boost revenues from energy exports.

Macklem said if energy prices stay high and there is evidence that inflation is becoming more generalized and persistent, interest rates could be raised to cool inflation.

“On the other hand, if energy prices come back down (and) we see more weakness in the economy, we can lower our policy rate to add more support,” he said.

Macklem said it is not possible to put a timeline on when a decision to move rates would be made given the uncertainty around the conflict in the Middle East.

“We’re in week three. This is an economic shock,” he said. “How big it is is going to depend a lot on how long it lasts, whether it widens, how disruptive it is.”

The Bank of Canada must also weigh several possible outcomes from the renegotiation of the Canada-U.S.-Mexico Agreement (CUSMA) as it makes rate decisions, with talks just getting underway.

Despite a weak jobs report last week and sluggish gross domestic product (GDP) growth over the past few quarters, bond markets have been predicting the Bank of Canada will raise rates later this year, but several economists have questioned that view.

If there is economic weakness combined with rising inflation, it would present a dilemma for central banks, including the Bank of Canada, Macklem said.

“Raising interest rates to slow inflation could further weaken the economy,” he said. “Easing interest rates to support growth risks pushing inflation well above target.”