BENGALURU, March 13 (Reuters) - The Bank of Canada is forecast to keep its overnight rate on hold next week and for the rest of this year, for now looking through inflation risks from the Middle East war, according to most economists in a Reuters poll who have kept a steady outlook since December.
A net oil exporter, Canada's economy could be more insulated than many of its peers to the recent surge in global crude prices, which spiked as much as nearly 70% after the U.S.-Israel war on Iran began on the last day of February.
But higher energy prices still squeeze consumers globally. Those inflation risks have already sent Canada's interest-rate-sensitive two-year bond yield up more than 40 basis points and pushed markets to price in at least one rate hike by end-December.
BoC Deputy Governor Sharon Kozicki recently said sometimes rates needed to go up even when the economy is weak. But economists in the March 10-13 Reuters poll rejected the case for hikes.
The economy was already soft, and labour and housing market activity were sluggish before the conflict. Elevated trade uncertainties, with the U.S.-Mexico-Canada agreement up for renewal in July, only add to the worries.
February's weak jobs data, released after the poll was conducted, is likely to reinforce expectations policymakers will stay on hold, at least for now.
The BoC will keep its overnight rate on hold at 2.25% on March 18, according to all 33 economists, largely unchanged from the January survey. A strong 76% majority of forecasters, 25 of 33, predicted rates to remain steady at least through 2026, an outlook unchanged since December.
While five expected at least one cut, three saw one or more hikes.
"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," said Doug Porter, chief economist at BMO Capital Markets.
In response to an extra question, 20 of 24 economists said it was unlikely the central bank would raise rates this year.
"Policymakers will generally look through an oil price shock unless inflation expectations become unanchored, underlying inflation reaccelerates, or the output gap closes meaningfully," said Royce Mendes, head of macro strategy at Desjardins Group.
"At this stage, it’s far too early for central bankers to conclude any of those conditions are materialising...That said, officials will likely layer on a reference to upside inflation risks from higher global energy prices."
Inflation has hovered around the middle of the BoC’s 1-3% target for much of the past year, with core measures steadily easing since September.
A long hold on rates is unlikely to offer relief to the already struggling housing market. Surging bond yields threaten to push mortgage rates higher, worsening affordability.
Home prices have slipped about 5.5% since June 2024 despite 275 basis points of BoC rate cuts. They are expected to stagnate this year, according to a separate Reuters poll median with forecasts ranging between a fall of 5% and a rise of 4.1%. However, most of Canada’s top five banks expect further declines.
House prices in Toronto and Vancouver are also expected to fall this year.
"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," BMO's Porter added.
"In fact, if anything, that makes the case stronger, the BoC should not be raising interest rates."
(Other stories from the Reuters global economic poll)
Reporting by Indradip Ghosh; Polling by Vijayalakshmi Srinivasan; Editing by Ross Finley
