The Bank of Canada's monetary policy meeting minutes, released on Wednesday, revealed that senior officials were uncertain about the sustainability of the economic growth recovery. They also considered the possibility of raising interest rates due to a renewed escalation of hostilities in the Middle East.

The minutes cover the eight days of deliberations leading up to the Bank's decision on July 15 to hold its policy rate steady at 2.25%. At that time, Governor Tiff Macklem presented what he considered a positive outlook for the Canadian economy, stating that businesses were adapting to trade uncertainty and that energy prices had eased following a temporary agreement between the US and Iran.

However, since July 15, the US-Iran conflict has intensified. Crude oil prices surged on Wednesday after Iran launched a surprise missile attack on US forces stationed in Jordan. US crude oil prices are now nearly 7% higher than they were on July 15, when the Bank of Canada released its rate decision.

Adding to the uncertainty, US President Donald Trump last week threatened to impose an additional 50% tariff on certain Canadian imports as early as August 19. This action is in response to what Washington calls discriminatory treatment by Canada towards US automobiles, alcohol, and dairy products. This move casts a shadow over Canada's efforts to secure relief from existing high tariffs on key industrial sectors like metals and automobiles.

The minutes show that officials acknowledged the possibility of increased US tariffs as "an ever-present downside risk to economic growth." Despite this, members unanimously agreed that second-quarter economic growth would accelerate to an annualized rate of 2.5%, following a slight contraction in the previous three months, and that growth would continue to strengthen in 2027 and 2028. Yet, doubts persisted.

"Governing Council members had differing views on the sustainability of the near-term economic rebound," the minutes state. "Members agreed that close monitoring of data was required for signs that growth was broadening as expected." Officials expressed concerns that growth might not materialize as forecast due to business caution, weak foreign demand, persistently subdued housing activity, and slowing consumer spending.

Officials also voiced concerns about the inflation outlook. The minutes noted that the renewed strike near the Strait of Hormuz "highlighted that upside risks to inflation remain. If oil prices rise and remain elevated, it could spill over into other prices, increasing the risk of inflation contagion. This scenario could necessitate a monetary policy response."

Senior officials also discussed inflation expectations. The inflation rate fell to 2.8% in June after hitting 3.2% in May. The minutes show that policymakers noted short-term inflation expectations are fluctuating with gasoline prices. "Some members were concerned about signs of an upward trend in medium-term inflation expectations, but all agreed that long-term inflation expectations remain well-anchored."

Most economists predict the Bank of Canada's policy rate will remain unchanged for the rest of 2026, as a high level of spare capacity limits businesses' ability to raise prices. Some economists say the threat of new US tariffs further reinforces this view.