Policymakers expected to pause again Wednesday as oil shock clouds inflation path
The Bank of Canada is widely expected to leave its benchmark interest rate unchanged this Wednesday, as policymakers confront a fresh wave of uncertainty stemming from the global energy shock tied to the Iran war.
Economists across major Canadian institutions are aligned in forecasting another pause, which would mark a fourth consecutive hold as officials weigh conflicting signals on inflation and growth.
Recent analysis from RBC suggests the central bank will keep rates steady while assessing how rising energy prices filter through to broader inflation. The bank indicated that headline inflation could temporarily move above the Bank’s 1%–3% target range, driven largely by fuel costs rather than underlying demand.
At the same time, policymakers are expected to tread carefully, recognizing that monetary policy has limited ability to counter supply-driven shocks such as oil price spikes. RBC emphasized that rate decisions must remain forward-looking, focusing on where inflation is headed rather than reacting to short-term volatility.
That cautious stance is reinforced by signs that core inflation — a key measure of underlying price trends — remains relatively contained. TD Economics pointed to March data showing headline inflation rising to 2.4%, driven largely by gasoline, while core measures stayed below 2% on average.
The evolving geopolitical backdrop is complicating the outlook. The Iran conflict has disrupted global energy markets, pushing oil prices higher and adding to inflation risks even as economic momentum shows signs of moderation.
RBC economists expect the Bank to avoid exacerbating affordability pressures in the near term, particularly as higher fuel costs already weigh on households. They also noted that inflation expectations have edged up slightly, though not enough to force an immediate policy response.
Meanwhile, TD highlighted that financial markets have already reacted to the conflict, with bond yields rising and volatility in oil prices feeding into inflation concerns.
Despite the near-term pause, there is less consensus on where rates go next.
Scotiabank continues to anticipate that additional tightening could still be required later in 2026, projecting a cumulative increase of about 50 basis points by year-end as inflation risks persist.
Others, however, see the balance of risks shifting in the opposite direction. Some economists argue that weakening economic conditions could eventually open the door to rate cuts, particularly if underlying inflation continues to ease.
For now, the Bank of Canada appears poised to hold steady as it assesses how a supply-driven inflation shock interacts with a slowing domestic economy — a delicate balancing act that could define monetary policy decisions for the rest of the year.
