The escalating conflict in the Middle East and ongoing trade tensions have pushed talk about whether the

Bank of Canada

might raise interest rates on Wednesday to the sidelines.

Economists expect the key overnight

interest rate

will be held at 2.25 per cent, with some believing the current pause will last longer, even as markets price in an increase in the second half of the year.

“The ongoing trade uncertainty and fresh conflict-driven unknowns both lead the Bank of Canada to the same point: an ongoing policy pause,” Doug Porter, chief economist at BMO Financial Group, said.

He said a

weak jobs report

last week, shaky gross domestic product (GDP) growth over the past few quarters and the uncertain outcome of renegotiating the

Canada-United States-Mexico Agreement (CUSMA)

should keep the bank from raising rates despite what markets are predicting.

 

“To put it mildly, we believe that a rate hike this year would be an extraordinarily bad policy decision,” he said in a post on X.

A spike in energy prices that followed attacks on Iran by the U.S. and Israel is stoking inflation fears, which some expect will put pressure on the Bank of Canada to raise rates.

Porter expects

inflation,

which had appeared mostly tamed and coming back down to two per cent, will push back up. But even if it passes the central bank’s upper target of three per cent, he said policymakers will look at factors such as a “soggy”

housing market

that will act as a counterbalance.

Avery Shenfeld, chief economist at CIBC Capital Markets, said there is enough economic slack to prevent a spillover of inflation to core prices if the oil shock proves to be short-lived. In this scenario, the Bank of Canada could be convinced that current

interest rates are controlling inflation.

But if there is spillover into other parts of the economy, there could be more pressure to raise rates, something the markets may be pricing in. However, Shenfeld said weak economic and job growth make that decision less likely.

It may be too early for the Bank of Canada to fully interpret the inflation picture, but there are fewer questions about the “decidedly anemic” economic growth, he said.

“The first quarter is off to a weak start, underscored by soft readings in most of the growth and employment data we have for the first month or two of the year,” he said, adding that he could not fathom why markets were pricing in almost two quarter-point hikes this year.

 

“Even if the governor (Tiff Macklem) doesn’t offer a full-throated dovish outlook on inflation, by not giving any hints of a rate hike ahead, he’ll throw some cold water on those inclined to position themselves for a policy tightening this year.”

Porter said trade troubles remain high on the central bank’s radar even as the conflict in the Middle East occupies headlines and drives new fears.

 

Renegotiation of CUSMA is a big uncertainty since talks appear to be getting under way with several possible outcomes, including scenarios that could lead to interest rate cuts.

“The worst-case scenario, an end to the (trade agreement), would likely mean aggressive rate cuts,” Porter said.

  • Why the Bank of Canada is likely to stand pat amid an oil crisis
  • Canada’s inflation rate cools more than expected

He said the most upbeat scenario is a quick and painless new trade deal that would drive swift improvement for the broader economy as businesses unleash pent-up investment and hiring demand.

However, given that Canada is among the dozens of countries swept up in the U.S. administration’s latest trade-related investigations — this time into forced labour — Porter said he expects the talks will be bumpy.

• Email: bshecter@postmedia.com