There are too many unknowns for the

Bank of Canada

to hint at where it might take

interest rates

if the conditions call for a change in monetary policy, say economists, after policymakers on Wednesday

held rates at 2.25 per cent

for the third straight time.

Among the unknowns are how long the war in

Iran

could last, the effects of the

oil-price

shock on the Canadian economy and the looming review of the Canada-United States-Mexico Agreement (

CUSMA

).

Here’s what economists think of the latest rate decision and where the Bank of Canada goes from here.

‘Opposing forces’: Desjardins

“The Bank of Canada is caught between two opposing forces: surging global energy prices and a weakening domestic economy,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note.

Energy prices have risen around 40 per cent since the start of the U.S.-Israel-led attack on Iran, while Canada’s first-quarter gross domestic product (GDP) could significantly undershoot the Bank of Canada’s estimate for annualized growth of 1.8 per cent.

However, Mendez said policymakers took the threats posed by the deteriorating job market, souring business conditions and additional financial stress of higher energy prices on households over the risks that elevated oil prices pose to inflation.

The Bank of Canada also removed the line in its statement that the current level of interest rates looked “appropriate,” but Mendes said that doesn’t indicate any imminent rate hikes.

“The tone of these communications reinforces our view that the Bank of Canada is willing to look through the impacts of higher energy prices on (the consumer price index) so long as the conflict doesn’t last for too long,” he said.

Desjardins expects the Bank of Canada to keep interest rates at their current level for the rest of the year.

‘Doves and hawks’: BMO

There was “a little bit of something for both the doves and the hawks” in the Bank of Canada’s latest interest rate decision, Douglas Porter, chief economist at BMO Economics, said in a note, pointing out that governor Tiff Macklem referenced the weak state of the economy and the inflation threat posed by higher energy prices.

But he said the doves — those calling for rate cuts rather than hikes — won out.

“The quick takeaway is that the (Bank of Canada) can afford to be patient over the near term,” he said, referring to Macklem’s comments that the effects of the Iran war look “contained” for now.

Still, Porter said it was important to acknowledge that Macklem said that if energy prices stay high, the Bank of Canada would not let the effects “broaden and become persistent inflation.”

Markets are betting for a rate hike by year-end, but he said the case for that call is “weak,” especially because of the continuing uncertainty around trade talks with the U.S.

He also said the war in Iran is squeezing the Bank of Canada between slowing growth and rising inflation risks, and that interest rates are likely on hold until the breadth of the energy price shock is known.

“It’s also abundantly clear that the (Bank of Canada) was more concerned about the (economic) outlook prior to the war, and would have been even more dovish in today’s statement were it not for the spike in oil prices,” he said.

‘Marginally dovish’: Capital Economics

“The Bank of Canada sounded marginally dovish while keeping its key policy rate at 2.25 per cent today,” Bradley Saunders, North America economist at Capital Economics Ltd., said in a note.

He said the central bank pointed to a worsening economic outlook while at the same time “looking through” the immediate impact of the war in Iran.

He said poor trade and manufacturing sales data mean GDP likely fell at the start of the year and that the loss of 84,000 jobs in February, coupled with declining hours worked, reinforces that outlook.

Economists estimate that growth for the first quarter will likely come in below one per cent annualized versus the Bank of Canada’s projection of 1.8 per cent. Fourth-quarter GDP shrank 0.6 per cent.

However, upcoming interest rate decisions will pivot on two “highly uncertain” events — the war in Iran and trade negotiations — with varying outcomes pushing the Bank of Canada to possibly hike rates to corral spreading inflation if elevated oil prices persist or cut if U.S. President Donald Trump were to pull out of trade talks.

“As Macklem keeps reminding us, the range of potential outcomes is wider than at any time in recent years,” Saunders said. “At the margin, though, today’s decision supports our view that the Bank (of Canada) will not seriously consider tightening policy until early next year.”

• Email: gmvsuhanic@postmedia.com

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