By Nushaiba Iqbal
BENGALURU, Aug 28 (Reuters) - The Bank of Canada will keep its overnight rate at 2.25% on Wednesday and leave it unchanged for at least another year, according to a Reuters poll of economists who have not changed their outlook following the suspension in trade talks with the United States.
Policymakers have held rates steady since October, watching for signs of rising inflation and weaker economic activity since the start of the U.S.-Israeli war with Iran in late February along with mounting
trade tensions with its main export market.
Inflation was already at the top of the BoC's 1-3% target range in July. But stable core inflation suggests demand remains weak and taken together with an expected recent economic recovery gives the central bank room to wait before raising rates.
The survey, taken after Canadian Prime Minister Mark Carney walked away from the latest round of tariff negotiations on August 22 and announced retaliatory tariffs and support measures for affected businesses, showed rates on hold at 2.25% for the rest of this year and until the third quarter of next year.
All 35 economists expected the overnight rate to stay on hold at the conclusion of the Bank's policy meeting on September 2, in line with market pricing.
The BoC is forecast to raise the rate to 2.50% in the fourth quarter of next year, unchanged from expectations in a July poll.
“In the near term, any concerns over inflation ahead are roughly offset by risks to economic growth from trade tensions, leaving the Bank in a watchful-waiting stance,” said Avery Shenfeld, managing director and chief economist at CIBC Capital Markets.
Nearly half of economists who provided a view, 47%, said the BoC will raise rates at least once by end-Q2 2027.
Canada’s exports to the U.S. continue to be shielded by the U.S.-Mexico-Canada free trade agreement, which expired on July 1 and which the U.S. has opted to review on an annual basis rather than extend for another 10 years.
Some economists raised concerns about added inflation pressure stemming from recent currency weakness.
“The Canadian dollar has already weakened because of this failure of the trade talks. So that is going to be more of an inflationary impact,” said Jennifer Lee, senior economist and managing director at BMO Capital Markets.
But for now, an escalation in the trade war is expected to mainly be a drag on gross domestic product growth in Canada rather than a source of increased inflation pressure. It will be offset to some extent by the federal government’s support measures, some economists said.
“The way I think about the (recent)...tariffs is, it helps to offset some of the stronger data we've seen over the last few months,” said Robert Both, macro strategist at TD Securities, adding the economic impact would be narrow enough it could still allow the BoC to hike rates next year.
The Canadian economy likely grew an annualized 3.4% last quarter, recovering from a technical recession, according to a separate Reuters poll ahead of official data due on Friday.
(Other stories from the Reuters global economic poll)
(Reporting by Nushaiba Iqbal; Polling by Sarupya Ganguly; Editing by Hari Kishan, Ross Finley and Chizu Nomiyama )
