By Promit Mukherjee
OTTAWA, April 27 (Reuters) – The Bank of Canada is expected to keep rates on hold at 2.25% on Wednesday as the oil price shock from the Iran war is a temporary blip unlikely to have a lasting impact on inflation expectations, economists said.
Central banks act if inflation expectations signal sustained price pressures. Economists say the rise in gasoline prices as a result of the Iran war may lift April inflation but higher prices are unlikely to last long enough to warrant action.
Canada’s annual inflation rate rose to 2.4% in March as higher crude oil costs drove up gasoline prices.
While inflation rose to its highest since December, it remains around the midpoint of the BoC’s 1% to 3% target range.
At the same time, the economy, while avoiding a recession many feared from U.S. tariffs, has been weak.
Governor Tiff Macklem said earlier this month he was not concerned about the near-term spike in inflation expectations due to the war.
Economists said that a policy move would be needed only if inflation, driven by higher gasoline costs, remained elevated.
“What the bank is looking for is whether these expectations of inflation become ingrained among consumers and among businesses, and right now, we are not seeing that,” said Gemma Stanton-Hagan, director of economics and policy at PwC.
“There’s a lot of weakness in different areas of the economy,” she said, adding these factors seem to support a hold by the BoC.
Money markets also expect a hold, but are pricing in a rate hike in the last quarter of the year, diverging from what most economists are predicting.
A Reuters poll showed that a majority of economists expect the BoC to keep its key policy rate on hold throughout the year, unchanged from before the war.
The BoC will announce its monetary policy decision on April 29 at 9:45 a.m. ET (1345 GMT). It will also release the quarterly Monetary Policy Report, where it will present its forecasts for the economy and inflation.
Pedro Antunes, chief economist at Signal49 Research, an independent economic research organization, said the bank would be upgrading its forecast for GDP and inflation for the monetary policy report.
However, he said the BoC has limited tools to help the country deal with the oil shock, and it will be the fiscal policy that should take centre stage.
“The bank is now focused on keeping wage growth aligned with its 2% target,” he said, adding it would not want a consistently high wage inflation as that affects long-term inflation expectations.
“The bank is going to talk tough in the monetary policy report,” he said.
The policy decision comes a day after Finance Minister François-Philippe Champagne will present his mid-term fiscal update.
(Reporting by Promit MukherjeeEditing by Nick Zieminski)
