Key Takeaways
- The Bank of Canada will likely keep interest rates steady at its April 29 meeting.
- Policymakers are widely expected to look past the transitory effects of energy inflation.
- The bond market is still pricing in an interest rate hike later this year.
The Canadian economy continues to face uncertainty from the Iran war and the energy-driven inflation it’s fueled. Still, analysts say this is unlikely to prompt the Bank of Canada to hike interest rates on Wednesday. While policymakers are expected to note the impact of higher oil prices, which caused inflation to jump in March, there’s a broad consensus that the Bank will treat it as a transitory effect that doesn’t warrant a policy response.
In the bond market, a hike is priced in for later this year. The central bank has kept interest rates at 2.25% since December. It is meeting for the third time this year on Wednesday.
Jack Manley, global market strategist at JP Morgan Asset Management, rules out a rate hike at the central bank’s April 29 meeting, despite the recent spike in inflation. In March, Canada’s inflation accelerated to 2.4% month over month from 1.8% the prior month. But core CPI, which strips out food and energy prices, edged lower to 1.9% month over month from 2.0%. “One print does not make a trend,” Manley says, adding that “while I expect further inflationary pressure to build in the months to come, I don’t think full-year inflation expectations have moved a whole lot. As a result, a hike is still off the table.”
March Inflation to Have Minimal Impact on Wednesday’s Meeting
Despite a rebound in inflation, the Bank of Canada won’t be in a hurry to raise interest rates, according to Philip Petursson, chief investment strategist at IG Wealth Management. “While inflation is likely to trend higher on higher energy prices, this is something that is beyond the reach of interest rate policy,” he says. “Higher oil prices are a function of global supply disruptions and uncertainty in the Middle East, not due to higher consumer demand.”
Shelly Kaushik, senior economist at BMO Economics, points to another reason a rate hike is unlikely: steady core measures. These are the Bank of Canada’s preferred gauge, stripping out the more volatile items in the CPI basket. “Headline inflation did accelerate, but not as much as expected, given the outbreak of the war, and core inflation metrics were well-behaved,” she says. “While it’s still too early to gauge the full impact of the war, this report argues against hiking, at least over the short term.”
Kaushik forecasts that inflation will top 3% as higher oil prices pass through to April. However, the pause in the federal gas tax—a temporary suspension of the federal tax on gasoline and diesel from April 20 to Sept. 7—will help inflation cool beyond April. Still, she thinks that much depends on what happens with the war and the Strait of Hormuz, a choke point for global oil flow. “The Bank will be watching for signs of inflation persisting through some combination of a more prolonged war/closure of the Strait, higher prices spreading to other goods and services, and inflation expectations responding to higher prices,” Kaushik says.
Markets Still Lean Toward a Rate Hike in 2026
Unlike analysts, markets are still pricing in one hike in 2026, even after scaling back expectations for multiple rate hikes following the latest CPI data. This implies market expectations for energy prices will remain elevated long enough to seep into broader inflation, which could prompt the Bank to tighten policy.
Charles St-Arnaud, chief economist at Servus Credit Union, says, “Oil prices need to remain close to USD 100 for the rest of the year to justify the current hike expectations.” Brent crude oil prices, which have remained stubbornly elevated since the onset of the Iran war, stood at USD 105 per barrel as of April 24.
JP Morgan’s Manley highlights the job market slack as another factor that will prevent the Bank from nudging rates higher. “As long as the labor market stays soft, I don’t believe [Bank of Canada Governor Tiff] Macklem will be willing to tighten the screws on the Canadian consumer just to push gasoline prices lower,” he says. Canada’s anemic housing market creates another barrier to a rate hike. “I have a hard time imagining that the Bank is interested in further stressing housing affordability, which has only recently started to improve,” Manley notes.
Trade Negotiations Still Key to the Rate Path
The conflict may have pushed the trade war uncertainty into the background, but the upcoming renegotiation of the Canada-United States-Mexico Agreement remains a critical factor in the Bank’s policy outlook. The outcome of the trade talks will impact the labor market, a key component of the Bank’s policy calculus, according to Manley.
“If Canada walks away in July with a clearer view on its commercial position with the US, and that position is at least somewhat favorable, then maybe you see an increase in business confidence, which leads to more hiring, which leads to a tighter labor market, which gives the Bank of Canada ammunition for a hike,” Manley says.
The Door to a Rate Cut Isn’t Closed
For all the talk of tightening, some analysts still believe the Bank’s next move could be easing. “A rate cut is the higher probability,” says IG Wealth’s Petursson. “Even though it isn’t priced into the futures market, when you analyze the language of the prior statement by the Bank of Canada, it reads more dovish than hawkish.” He thinks the Bank would rather provide an “insurance cut” than risk a materially slower Canadian economy.
BMO’s Kaushik points to how inflation remained contained until the oil shock, highlighting that ”rate cuts could have been on the table, if not for the [Iran] war.”
JP Morgan’s Manley says the economy is in reasonably good shape, owing to the central bank frontloading its easing cycle with large and frequent cuts last year. The Bank started cutting in the summer of 2024, bringing its policy rate from a peak of 5.00% to the current 2.25% in December. “[Further] cuts would only occur if there’s a meaningful pullback in growth or a surge in the unemployment rate. Neither is a base case,” he says.
