OTTAWA--The Bank of Canada on Wednesday left its main interest rate unchanged at 2.25%, and said the escalating trade conflict between the U.S. and Canada threatens to stifle a nascent rebound and add to inflation.

Economists say the central bank's concern over higher energy prices has intensified, and an interest rate increase before the end of 2026 can't be necessarily ruled out.

The move was widely expected, according to a Wall Street Journal survey of economists last week, as policymakers take a wait-and-see approach as the economy deals with a sharp breakdown in the U.S.-Canada relations over trade.

The fraying of economic and diplomatic ties between the neighboring countries poses yet another headwind for Canada, which recent data indicated had perhaps turned the corner after a trade-uncertainty-induced period of stagnant activity.

This marks the seventh straight decision in which Canada's central bank left its target for the overnight rate unchanged. Optimism about a rebound surfaced after second-quarter data indicated that the economy grew by 3.3% annualized, exceeding the Bank of Canada's forecast of 2.5% expansion. Growth was broad-based, powered by exports, household consumption and business investment.

The second-quarter performance confirmed "what businesses have told us," said Bank of Canada Gov. Tiff Macklem, according to prepared remarks he is set to deliver at a press conference. Firms "are adapting to tariffs, new technology and increased uncertainty."

However, Macklem added, "new U.S. tariffs and increased trade uncertainty pose risks to the sustainability of the rebound in economic activity."

Besides the uproar in trade, Macklem said there are concerns on the inflation front, as market expectations for oil prices have shifted upward since July. A U.S.-Iran truce reached in June fell apart during the summer, and military attacks resumed this week.

"With the conflict ongoing and shipments through the Strait of Hormuz still curtailed, upside risks to our inflation forecast have increased," Macklem said. "The longer oil prices and refinery margins stay high, the greater the risk that higher energy prices spill over and turn into persistent inflation."

Macklem added that new U.S. tariffs of 50% on some Canadian goods, combined with retaliatory tariffs that Ottawa is set to be implemented next Tuesday, could increase costs for businesses and lead to higher consumer prices.

This suggests central bank officials "view inflation as a greater threat to the central bank's price stability mandate than trade disruption, making it inappropriate to consider easing policy at this juncture," said Karl Schamotta, chief market strategist at global-payments firm Corpay. Macklem noted the new U.S. tariffs are expected to hit certain sectors hard but "don't expect them to have a large direct impact on the overall level of economic activity."

The Canadian dollar versus the U.S. dollar strengthened following the central bank's decision. Bond yields also rose.

Stephen Brown of Capital Economics said the central bank also removed wording from its July decision arguing that rate levels are appropriate, and instead said officials would adjust policy as needed. "An interest rate hike at the final meeting of the year, in December, is arguably now looking more likely than our current forecast," said the economist.