Overview
Economists surveyed in a Reuters poll expect the Bank of Canada (BoC) to maintain its policy rate at 2.25% at the upcoming March 18 decision and to keep rates unchanged for the remainder of the year for now, despite inflationary pressures tied to the recent Middle East conflict. The poll, conducted from March 10-13, reflected little change in sentiment since December.
Market reaction to oil shock
Global crude prices jumped sharply after the U.S.-Israel war on Iran began on the last day of February, with oil spiking by nearly 70% at the height of the move. That surge has lifted Canada’s two-year bond yield by more than 40 basis points and led markets to price in at least one BoC rate increase by end-December. Still, poll respondents largely dismissed the case for an imminent policy response.
Poll findings
All 33 economists in the survey predicted the BoC would hold the overnight rate at 2.25% on March 18. A large majority - 25 of 33 forecasters, or 76% - said they expected rates to remain steady at least through 2026. Five economists anticipated at least one rate cut this year, while three expected one or more hikes.
In an extra question posed to respondents, 20 of 24 economists said it was unlikely the central bank would raise rates this year.
Why forecasters favour a pause
Economists cited a soft domestic economy heading into the oil-price shock, weak labour market data and sluggish housing activity as reasons to refrain from raising rates. Elevated trade uncertainty - including the upcoming renewal of the U.S.-Mexico-Canada Agreement in July - also dampens the argument for tightening.
Doug Porter, chief economist at BMO Capital Markets, summed up the cautious stance: "Canada came into this in relatively weak shape because of the trade uncertainty. I do not believe the economy needs a rate hike. I’m actually concerned growth could weaken materially if oil prices go a whole lot higher from here."
Policymakers’ likely lens on oil-driven inflation
Analysts expect the BoC to treat the recent oil price shock as an upside risk to inflation rather than a force that requires immediate action. Royce Mendes, head of macro strategy at Desjardins Group, said policymakers would typically "look through an oil price shock unless inflation expectations become unanchored, underlying inflation reaccelerates, or the output gap closes meaningfully." He added that at this stage it was too soon for central bankers to conclude those conditions were emerging, though officials would likely acknowledge the upside inflation risk from higher global energy prices.
Inflation and core measures
Inflation has been hovering near the midpoint of the BoC’s 1-3% target for much of the past year, and core inflation measures have been easing since September. That trend underpins the view that a persistent tightening of monetary policy is not currently required.
Implications for housing and mortgage markets
Forecasters and bank economists warned that keeping the policy rate on hold will not necessarily relieve pressure on the housing market. Rising sovereign bond yields threaten to push long-term mortgage rates higher, worsening affordability for homebuyers. Home prices have already fallen about 5.5% since June 2024 despite 275 basis points of BoC rate cuts. Median forecasts from a separate Reuters poll expect house prices to stagnate this year, with individual forecasts ranging from a decline of 5% to a rise of 4.1%.
Most of Canada’s top five banks, according to the poll, still see further price declines, with house prices in Toronto and Vancouver expected to fall this year.
BMO’s Porter emphasized the consumer impact of energy-driven inflation: "Consumer confidence is likely to be hit by the rise in gasoline prices, and we’re probably going to see some pressure on grocery prices as well. That, combined with a backup in long-term mortgage rates, threatens to really weigh on the housing market further in the year ahead." He added, "In fact, if anything, that makes the case stronger, the BoC should not be raising interest rates."
Context and next steps
February’s weak jobs report, released after the poll was completed, is likely to reinforce the expectation among market participants and economists that policymakers will keep rates on hold for now. The balance of risks identified by respondents centers on the trajectory of energy prices, the path of core inflation, and the evolution of trade uncertainties tied to the USMCA renewal process.
Note: Poll results reflect the views of the 33 economists surveyed between March 10-13 and the additional responses to follow-up questions.