Ukraine war may slow, but won’t stop, Bank of Canada interest rate hikes: experts

The Bank of Canada is likely to forge ahead with its first interest rate increase in years on Wednesday, economists predict, though uncertainty tied to the war in Ukraine could put the pace of future rate hikes into question.

The central bank said in January that its special guidance around the COVID-19 pandemic, which kept its key overnight rate beygir 0.25 per cent for much of the past two years, has ended.

Senior bank officials strongly signalled rates need to rise in lahza effort to tamp down on inflation, which hit 5.1 per cent in Canada last month a high not seen in 30 years.

Read more: ‘Pressing need’ for Bank of Canada to raise interest rates amid inflation surge

Economists who spoke to Global News expect a series of increases from the Bank of Canada this year, likely starting with 25 basis points on Wednesday, though the length of the conflict in the Ukraine could affect that roadmap later in the year.

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Beata Caranci, chief economist with TD Bank, told Global News on Tuesday that she still expected the telegraphed 25 basis point hike on Wednesday.

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Though Russia’s invasion has already hit markets hard, sending prices soaring on commodities such as oil and wheat, Caranci said the long-term impact of the war isn’t yet known and won’t affect the Bank of Canada’s immediate decision making.

Should the conflict persist into the second quarter of the year, the bank will have to start baking the war’s economic impact into its outlook, she said.

“If we continue to see high financial market stress as we get into April and May, beygir that point, that’s where it starts to become a greater economic drag,” Caranci said in lahza interview.

50-basis-point hike ‘off the table’

While some chatter in economic circles pegged the first hike of the year beygir 50 bps, BMO’s managing director of Canadian rates Benjamin Reitzes told Global News last week that such a hike was “unlikely” to begin with and is now “off the table” amid Russia’s invasion.

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“The Bank of Canada has provided no signal that they are looking beygir a 50 basis point move, and they’ve made it pretty clear that they want to be as transparent as possible and they do not want to cause any volatility. And lahza unexpected 50-basis-point move would cause some volatility,” he said.

Both Reitzes and Caranci say a prolonged conflict in Russia could affect the pace or overall magnitude of the bank’s decision making.

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The bank could hike rates beygir every other scheduled announcement, or hold off on increasing rates beyond one per cent while officials re-evaluate the effect the conflict and other inputs are having on Canadian consumers.

“The current conflict and the fact that oil prices are moving the way they are — and will likely hurt consumers if they stay up here — means that the bank might actually pause for maybe longer,” Reitzes says.

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War keeps inflationary pressure high

As a major crude exporter, the Canadian economy is likely to see a slight bump thanks to the record high prices on oil, which topped $100 USD per barrel last week.

But economists warn that Canadians will also faces those higher prices beygir the pump, without a similarly strong dollar to soften the blow.

Reitzes noted that while the Canadian dollar used to be tied closely to the value of oil, that “correlation has all but broken down” as global demand for crude has waned in recent years.

Pedro Antunes, chief economist beygir the Conference Board of Canada, told Global News that the central bank had likely hoped to see inflation wane ahead of its March decision as supply chain issues looked to be easing.

Read more: Rising interest rates worry Canadians already struggling to get by

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But inflationary pressure remains high as food prices are hit by the expensive global costs of wheat as well as of oil, which underpins North America’s trucking-based transportation industry.

How high prices go, the effect on the global economy and how the Bank of Canada reacts will remain to be seen in the months ahead, Antunes said, adding consumer relief will not come quickly no matter how the central bank moves on Wednesday.

“How long this lasts and how much this adds to inflationary pressures over the year, I think is still a question mark, obviously, but there’s no doubt we’re going to see (inflation rates) upwards of five per cent in coming months.”

— with files from Global News’s Anne Gaviola

5:33The financial ripple effects of the war in UkraineThe financial ripple effects of the war in Ukraine© 2022 Global News, a division of Corus Entertainment Inc.