Ottawa: The Bank of Canada kept its benchmark interest rate unchanged on Wednesday, warning that weak growth and inflation pressures linked to higher energy prices have created a policy dilemma. The central bank held its policy rate at 2.25% for a fifth consecutive meeting, in line with market expectations.

According to Anadolu Agency, Bank of Canada Governor Tiff Macklem said economic weakness combined with rising inflation presents a dilemma for monetary policy. He noted that raising interest rates to curb inflation could further weaken the economy, while easing policy to support growth could increase the risk that higher inflation becomes persistent. The bank said holding the policy rate steady currently balances those risks, stressing that monetary policy must remain flexible amid elevated uncertainty.

The central bank pointed to risks from US trade policy uncertainty and the ongoing conflict in the Middle East, which has kept energy prices elevated. Macklem said the price of oil is roughly $10 per barrel higher than the assumption used in the bank's April monetary policy report.

The bank said it now expects consumer inflation to remain close to 3% in the coming months before gradually easing toward its 2% target. Canada's annual inflation rate stood at 2.8% in April, driven partly by higher energy prices, though core inflation measures eased, suggesting underlying price pressures remain contained.

The Bank of Canada said there is so far limited evidence that higher energy costs are broadly feeding into other prices. However, it warned that if the Middle East conflict continues and higher energy prices lead to more generalized inflation, monetary policy may need to do more, including possible consecutive rate increases.

The central bank added that significant new US trade restrictions could also weaken growth and create conditions for lower rates. The decision comes after data showed Canada's economy contracted at an annualized rate of 0.1% in the first quarter, following a 1% contraction in the fourth quarter. The central bank said growth appears likely to resume in the second quarter but added that the economy is expected to remain in excess supply.