Policy hold as war risk lifts inflation – Rabobank

Rabobank Strategist Molly Schwartz and Christian Lawrence expects the Bank of Canada (BoC) to keep its overnight rate at 2.25% at the March 18 meeting and through year-end, despite elevated inflation and weaker activity. The war in Iran and higher Oil prices are seen adding inflationary pressure that monetary policy cannot offset, while markets tentatively price in a possible hike.

BoC seen on prolonged policy pause

“We expect the Bank of Canada to maintain the overnight policy rate at 2.25% at the March 18 decision. This is the unanimous view amongst Bloomberg surveyed analysts, including ourselves, and is fully priced in by the market.”

“The economic environment in Canada, according to the economic data available, is still suffering from elevated inflation and deteriorating activity. However, with the war in Iran and rising energy prices, new risks and fears are emerging.”

“We expect the Bank of Canada to maintain the overnight policy rate at 2.25% through year end, however, the market is starting to price the possibility of a hike into the OIS curve.”

“The tone from the Bank of Canada’s January 28 decision is likely to shift meaningfully at the upcoming meeting, even though the Bank’s policy options remain just as limited. We have argued for several meetings that the Bank would hold the overnight rate at 2.25%, given its lingering concerns about renewed inflation and the limited effectiveness of cuts in an economy strained by tariffs. Now, however, the Bank must also contend with the war in Iran and the escalating energy crisis, which introduce additional economic and inflationary pressures.”

“Despite these additional price pressures, our base case remains that the Bank of Canada will not raise rates this year. The inflation Canada is facing stems from geopolitical and supply-driven factors that the Bank cannot control, rather than from an overheated domestic economy. Raising rates would do little to contain energy-driven inflation and would instead add strain to an economy that is already in a vulnerable position.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)