Economists see BoC rate stuck at 2.25% this year even as oil climbs past US$100 a barrel
Oil back above US$100, rising bond yields and a softer Canadian economy are colliding just as central banks face renewed pressure to fight inflation rather than cut rates.
According to Reuters, economists in a March 10-13 poll expect the Bank of Canada (BoC) to keep its overnight rate at 2.25 percent on March 18 and leave it unchanged for the rest of this year.
A strong majority – 25 of 33 forecasters – expect no change at least through 2026, an outlook that has not shifted since December.
At the same time, markets have moved in a more hawkish direction.
Reuters reported that a roughly 40 percent surge in global oil prices since the US-Israel war on Iran began has pushed Canada’s two-year bond yield up more than 40 basis points and led traders to price in at least one BoC hike by end-December.
Canada enters this shock from a position of weakness.
Reuters said the economy was already soft before the conflict, with sluggish labour and housing markets and “elevated trade uncertainties” as the US-Mexico-Canada Agreement comes up for renewal in July.
February’s Canada weak jobs data, released after the poll, showed employment falling and are likely to reinforce expectations that policymakers will stay on hold for now.
Inflation, however, is not yet back on a firm 2 percent footing.
Reuters noted that overall inflation has hovered around the middle of the BoC’s 1–3 percent target band, with core measures easing since September.
RBC Economics expects headline CPI growth to tick lower to 2 percent in February – right at target – but said that will not be enough to move the BoC “from the sidelines.”
RBC pointed out that recent readings have been distorted by a past GST/HST tax holiday and the removal of the consumer carbon tax from energy prices, and that the BoC’s core median and trim measures have drifted lower to about 2.5 percent on average, mainly due to moderating shelter costs.
By RBC’s count, core services excluding shelter remained above 3 percent in January.
RBC also highlighted “pockets of price growth” that remain elevated, with groceries still up almost 5 percent year over year in January.
The drag from lower energy prices will reverse as oil spikes higher due to conflict in the Middle East.
RBC said it does not expect any change to the policy rate at this week’s meeting and that its base case assumes the rate stays unchanged for the remainder of 2026 as inflation trends lower toward target.
Housing remains a pressure point.
Reuters reported that home prices have slipped about 5.5 percent since June 2024 despite 275 basis points of BoC rate cuts and are expected to stagnate this year, with forecasts ranging from a 5 percent drop to a 4.1 percent rise.
Most of Canada’s top five banks expect further declines, and house prices in Toronto and Vancouver are also expected to fall.
Higher bond yields threaten to push mortgage rates higher and worsen affordability, while BMO’s Doug Porter told Reuters that rising gasoline and grocery prices, combined with a “backup in long-term mortgage rates,” could weigh further on the housing market in the year ahead.
Globally, the same energy shock is reshaping rate expectations.
The Financial Post reported that prices for West Texas Intermediate and Brent crude have pushed past US$100 and are up 50 percent and 45 percent, respectively, from March 1 after the closure of the Iranian-controlled Strait of Hormuz, which carries about one-fifth of the world’s sea‑borne oil supply.
This spike has “rekindled inflation risks … and is now threatening global growth outlook.”
According to the Financial Times, investors now expect the European Central Bank to lift its key rate once or twice this year and see a Bank of England hike as a possibility by year-end, reversing earlier expectations for cuts.
Traders have also dialled back expectations for further US Federal Reserve reductions, with just one or two quarter‑point cuts priced in, down from two or three before the conflict began.
CNBC reported that, in the United States, traders have abandoned hopes of an early summer Fed cut as oil nears US$100 a barrel and inflation fears rise, with fed funds futures now showing only one cut in December.
Reuters said all 96 economists in its March 6-12 poll expect the Fed to hold at 3.50 percent–3.75 percent on March 18, with about two‑thirds still looking for a first cut next quarter but almost 40 percent now expecting just one or no reductions this year.
