The Bank of Canada is widely expected to keep its key rate unchanged on Wednesday despite rising inflation risks due to the war in the Middle East, according to economists surveyed by the Star.
The conflict in Iran means the central bank is dealing with a new threat to inflation: higher oil prices, which can lead to a rise in the cost of everything from food to consumer goods and transportation.
Still, economists believe it’s too early for policymakers to move off the sidelines and start raising interest rates.
“We just don’t think the Bank of Canada will respond anytime soon without greater clarity on the situation,” said Claire Fan, senior economist at RBC. “We don’t think they should.”
In January, Bank of Canada governor Tiff Macklem emphasized that uncertainty makes it difficult to predict the future path for rates.
“We are monitoring risks closely,” he said. “If the outlook changes, we are prepared to respond.”
As of midday Friday, financial market odds for next week’s announcement were just over 90 per cent in predicting a rate hold, according to data supplied by the London Stock Exchange Group (LSEG).
The likelihood of a rate hike later this year, however, appears to be increasing. Markets are pricing in 50 per cent odds of that happening in September and 80 per cent odds by December, according to LSEG.
“If energy prices continue to rise rapidly and remain at a high level, that would classify as a pretty substantial supply shock,” Andrew Hencic, senior economist at TD, told the Star. “That’s when the prospect of rate hikes kind of starts being raised because you don’t want inflation expectations to get unmoored and start rising.”
That said, both Hencic and Fan are currently forecasting the bank will keep its policy rate at 2.25 per cent for the rest of 2026.
“We think they will be on hold,” said Hencic. “But, obviously, there’s a high degree of uncertainty around that — much higher than there was, I’d say, a month ago.”
An argument could also be made for the central bank’s next move to be a cut.
The supply shock caused by the Iran war “both increases pressure on inflation, but also dampens the growth outlook,” BMO chief economist Douglas Porter said in an interview.
Policymakers “have to try to decide which one is more under threat,” he continued.
“The way the market is leaning is that they’re going to have to respond to higher inflation. I don’t think that’s so obvious,” Porter said, adding that it wouldn’t be “wise” for the Bank of Canada to start raising rates when the Canadian economy is already showing signs of struggling.
Trade uncertainty continues to hurt economic growth.
On Friday, the release of a surprisingly weak February jobs report — with the unemployment rate rising to 6.7 per cent and the economy shedding more than 80,000 positions — supported the case for the bank to delay any rate hikes this year.
On Monday, Statistics Canada is set to release February inflation data, which will mostly reflect the period before the U.S. and Israel attacked Iran on Feb. 28. Economists believe it will not sway the central bank one way or another.
The Bank of Canada is scheduled to deliver its interest rate announcement at 9:45 a.m. on Wednesday.
