Bank of Canada to Hold Rates Steady While War Worries Brew

By Paul Vieira

OTTAWA--The Bank of Canada likely will keep its main interest rate unchanged Wednesday, but there is growing doubt that officials can hold rates steady the longer energy prices remain elevated, economists surveyed by The Wall Street Journal say.

The conflict in the Middle East has effectively closed oil-tanker traffic in the Strait of Hormuz, leading to a sizable jump in crude oil prices and what drivers pay to fill up their tanks. The energy-price shock has sharply lifted near-term inflation expectations, according to a recent Bank of Canada survey. Higher inflation expectations influence price setting by firms and spending plans by households, so the central bank is keep to those expectations close to its 2% target.

Iran presented on Monday a new offer to stop its attacks on ships in the Strait of Hormuz in exchange for a full end of the war--including the U.S. abandoning its naval blockade of Iranian ports, the Journal reported.

All 13 economists surveyed last week by the Journal predicted no change in the Bank of Canada's policy rate, which sits presently at 2.25%. Inflation did accelerate in March, by 2.4%, but that fell short of market expectations for a 2.6% climb.

"While upside risks to inflation remain, it may be too soon to determine whether the increase in inflation expectations will persist beyond the initial outbreak of the war," said Shelly Kaushik, economist at BMO Capital Markets. Analysts added that March data indicate inflation excluding energy and food rose 1.9% in March, and core prices--which strip out volatile items--decelerated during the month.

Bank of Canada Gov. Tiff Macklem has said officials do not expect higher energy prices to rapidly pass through and lift prices for other goods and services. He added officials do have a delicate balancing act, to refrain from raising rates prematurely and further slow down a struggling economy, while avoiding waiting too long to act before higher inflation becomes entrenched.

The survey of economists indicated that nine analysts believe Canada's central bank won't raise rates this year, although some provided caveats to their prediction. Three economists suggested a rate increase in the second half of this year is possible, depending on events in the Middle East. Only one economist has penciled in rate increases.

Charles St-Arnaud, chief economist at Servus Credit Union, said a relatively quick resolution to the U.S.-Iran conflict would lead to an easing in oil prices, allowing the Bank of Canada to remain on hold. Conversely, "a prolonged period with oil close to $100 a barrel would lead to increased inflationary pressures that are likely to become more sustained. In that case, we could expect the bank to hike, and it could be as early as July."

RSM chief economist Joe Brusuelas said his official forecast, of no change this year in the Bank of Canada's main interest rate, is contingent on the war in Iran ending by mid-year. "Should the war continue and destruction of production and refining capacity around the Persian Gulf region recommence, then we would need to revise that forecast," he said.

Also in the background is the state of talks to renew the existing U.S.-Mexico-Canada trade treaty, or USMCA. The bulk of Canadian exports to the U.S. have avoided tariffs because they comply with USMCA. However, U.S.-Canada talks on USMCA renewal have stalled, while negotiations with Mexico are at an advanced stage. Trade-related criticisms and threats between U.S. and Canadian officials have intensified this month, and some trade watchers fear Canadian officials, led by Prime Minister Mark Carney, are preparing for negotiations to fail.

Bradley Saunders from Capital Economics said uncertainty around the USMCA talks likely puts off a Bank of Canada rate increase until the first quarter of 2027, even if the Strait of Hormuz reopens soon. Trade-policy uncertainty has prompted companies and households to delay or cancel investment and spending plans, and Macklem has said the war in Iran represents "a new acute layer of uncertainty to an already challenging environment."

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

April 28, 2026 07:14 ET (11:14 GMT)