Early signs of softening discretionary spending amid higher fuel prices, continued tensions in the Middle East and trade uncertainties are likely to keep the

Bank of Canada from changing its key overnight interest rate on Wednesday. If, as widely anticipated by economists, the bank leaves the rate unchanged at 2.25 per cent, it would mark the fourth consecutive hold.

“We are comfortable with our view that the (Bank of Canada) will be on hold through 2026, barring a material change in the growth and/or inflation backdrop,” Robert Kavcic, a senior economist at Bank of Montreal, said.

Like other central banks, the Bank of Canada is trying to balance inflation expectations, driven largely by skyrocketing

oil prices resulting from the conflict in the Middle East, with ensuring the economy doesn’t slow down too much. Supply issues stemming from closure of the Strait of Hormuz , following attacks on Iran by the United States and Israel, also raise the prospect of ongoing supply constraints.

At home, Kavcic said recent data points, including stagnating job growth, subdued business investment and a tepid housing market, are in line with the Bank of Canada’s March assessment that risks to the economic outlook, including population trends and trade tensions with the U.S., were “tilted to the downside.”

Such trends may have supported an interest rate cut to stimulate economic growth prior to the oil shock, he said, but few economists see that happening now with inflation concerns in the picture. Many forecast that the Bank of Canada’s next move, when it comes, will be a rate increase. Market activity suggests this could happen before year-end.

“The market continues to price in tightening later in 2026. We believe that has probably gone too far,” Kavcic said. “It would likely require at least three months of evidence that core inflation is moving higher in the short term and evidence that inflation pressure is broadening.”

Economists at Toronto-Dominion Bank are also expecting the central bank to maintain its rate on Wednesday.

“With the economic fallout from the war still highly uncertain, it would be premature to pivot from a hold, particularly with core inflation still well-behaved,” Rishi Sondhi, an economist at TD, said in a note on Friday.

Headline inflation is up, rising 0.6 percentage points to 2.4 per cent, but the details were “modestly softer” than expected, he said, adding that gas prices have been more contained through April and the federal government has temporarily removed the excise tax on fuels.

Still, he said other data point to rising business input costs, with suggestions this could be passed on to consumers, and there has been some upward drift in inflation expectations since the start of the Middle East conflict.

This is likely to result in messaging from the Bank of Canada that central bankers won’t hesitate to adjust rates should

inflation look to be persisting or spreading to segments of the economy with less connection to energy prices.

“Expect the (Bank of Canada) to stress its willingness to act as needed to keep expectations anchored,”

Sondhi said. Derek Holt, head of capital markets economics at Bank of Nova Scotia, agrees rates will be held on Wednesday, but he is predicting hikes in the second half of 2026, a view he has held since before the Middle East conflict erupted in February.

His forecast is for a total of 75 basis points in hikes, with the key policy rate climbing to three per cent by year-end.

“It’s expected that there will be stronger warnings on the implications of an inflation shock to the policy rate’s path, but with no commitment,” he said in a note on Friday about the central bank’s upcoming decision. “No explicit guidance is likely, but the policy rate bias is likely to sound like it leans in a more hawkish-sounding direction.”

But David Rosenberg, president of Rosenberg Research & Associates Inc., said he thinks the Bank of Canada’s next move will be a rate cut to stimulate the economy.

He said inflation is running at just 1.95 per cent year over year when food and energy are removed compared to 2.4 per cent a year ago. At the same time, he said, the economy is “as flat as an ice hockey surface.”

Jeremy Kronick, chief executive of the C.D. Howe Institute and chair of the think tank’s monetary policy council, said the tension between inflation and economic growth is complicating the Bank of Canada’s decision-making.

“On the one hand, you want to raise rates … to tamp down on those inflationary pressures, but you also will potentially want to lower rates to stimulate demand if you need to,” he said.

“So with the uncertainty that’s kind of reigning and the stagflation environment, the prudent measure for the bank is to hold rates for now and kind of just see where things go for a bit.”

In its latest recommendation, C.D. Howe’s monetary policy council, whose members include academics and senior economists from Canada’s largest banks, said the Bank of Canada should hold the overnight rate until at least October and then raise it to 2.5 per cent by this time next year.

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