BoC: Rabobank expects policy pause amid rising inflation due to war risks

Bank of Canada Expected to Hold Interest Rates Steady

According to Rabobank strategists Molly Schwartz and Christian Lawrence, the Bank of Canada (BoC) is anticipated to keep its overnight rate unchanged at 2.25% during the March 18 meeting and likely maintain this level throughout the remainder of the year. Despite persistent inflation and signs of economic slowdown, the central bank is not expected to adjust rates, even as the conflict in Iran and surging oil prices contribute to additional inflationary pressures that monetary policy cannot easily address. Meanwhile, financial markets are cautiously factoring in the possibility of a rate increase.

Extended Pause in Monetary Policy Forecasted

“Our projection is that the Bank of Canada will leave the overnight policy rate at 2.25% at its March 18 announcement. This outlook is shared unanimously by analysts surveyed by Bloomberg, ourselves included, and is already reflected in market expectations,” the strategists noted.

They further explained that, based on current economic indicators, Canada continues to grapple with high inflation and weakening economic activity. The recent escalation of conflict in Iran and the resulting increase in energy prices have introduced new risks and uncertainties.

Looking ahead, Schwartz and Lawrence believe the BoC will keep the overnight rate at 2.25% through the end of the year. However, they acknowledge that the market is beginning to factor in a potential rate hike, as seen in the OIS curve.

The strategists anticipate a notable shift in the central bank’s tone at the upcoming meeting compared to the January 28 decision, even though policy options remain constrained. They have consistently argued that the BoC would maintain its current rate due to ongoing concerns about inflation and the limited impact of rate cuts in an economy already challenged by tariffs. Now, the central bank must also navigate the added complications of geopolitical tensions and rising energy costs, which are fueling further inflationary and economic pressures.

Despite these challenges, their main scenario is that the Bank of Canada will refrain from raising interest rates this year. The inflationary pressures facing Canada are largely driven by external geopolitical events and supply issues, rather than domestic overheating. As a result, increasing rates would likely have little effect on energy-related inflation and could further strain an already fragile economy.

(This report was produced with the assistance of artificial intelligence and subsequently reviewed by an editor.)