By Nushaiba Iqbal
April 24 (Reuters) - The Bank of Canada will hold its overnight rate steady next week and through the rest of the year, according to a majority of economists polled by Reuters, most of whom stuck to the same outlook they had before the U.S.-Israeli war with Iran.
While financial markets expect the central bank to lift its overnight rate in the fourth quarter, economists say a hike would only be needed if the surge in energy prices leads to sustained higher inflation. A weak economy
and a slack labour market argue against an increase.
Despite rising fuel prices, March inflation was 2.4%, within the BoC’s target range of 1% to 3%. Governor Tiff Macklem said last week a rise in short-term inflation expectations should not worry the central bank.
Surging oil prices have strained consumers in Canada like everywhere else, but the country's position as a net exporter provides the economy with some cushion to weather the blow.
NO CHANGE TO OUTLOOK SINCE MIDDLE EAST WAR
All 41 economists in the April 21 to 24 poll expected the BoC to leave the overnight rate at 2.25% on April 29 and more than 80%, 33 of 41, predicted it to stay unchanged this year. In a March poll, 76% of the respondents saw the central bank holding rates in 2026.
“Because of softening core inflation, it does give the Bank of Canada a lot more room to be flexible and patient,” said Claire Fan, a senior economist at RBC.
“They can wait for actual concrete signs of risk of inflation climbing higher, broadening and persisting...as opposed to rushing to make a decision.”
Inflation is forecast to average 2.9%, 2.7% and 2.5% in the current and upcoming quarters, around 50 basis points higher than predicted in January, medians showed.
Those upgrades have laid the path for a significant minority of economists, 14 of 34, to predict at least one rate increase by the end of March next year.
TRADE IS FOREMOST CONCERN
Canada’s free trade agreement with the U.S. and Mexico is up for renegotiation this summer. Janice Charette, Canada's chief trade negotiator to the U.S., said she did not expect both countries to resolve all issues before the July 1 deadline, but that would not mean the agreement, called USMCA, will collapse.
"After energy prices settle down the focus is going to turn entirely to...where the USMCA is headed. And frankly, I'm a bit concerned on that front. I am concerned trade is going to continue to be a drag on the Canadian economy," said Douglas Porter, chief economist at BMO Capital Markets.
Canadian GDP will grow 1.2% in 2026, down from 1.7% in 2025, poll medians from the April and January polls showed. This weaker growth creates an unfortunate combination with rising inflation but does not quite constitute stagflation, said Porter.
Stagflation is usually defined as an extended period of low or no growth, high inflation and rising unemployment.
The 2026 unemployment rate forecast was revised to 6.6% in the April poll, down from 6.7% seen in January's survey.
“We expected the labour market improvement to be very choppy,” said RBC's Fan, attributing job losses to the slowdown in sectors exposed or dependent on U.S. demand.
“As domestic demand picks up later this year, it's going to continue to support that improvement, balancing the trade weakness.”
(Other stories from the Reuters global economic poll)
(Reporting by Nushaiba Iqbal, Polling by Devayani Sathyan and Anant Chandak; Editing by Hari Kishan, Ross Finley)
