Bank of Canada expected to hold rates, may flag inflation risks of oil shock

* Bank of Canada to keep benchmark interest rates steady at 2.25%

* Iran war, high oil price has changed outlook, economists say

* Money markets leaning towards rate hike by the end of the year

By Promit Mukherjee

OTTAWA, March 18 (Reuters) - The Bank of Canada is widely expected to keep rates on hold on Wednesday, despite fears of higher inflation following the spike in oil prices stemming from the Middle East war, economists said. Canada's inflation is around 2%, the midpoint of the BoC's 1% to 3% control range. The policy rate at 2.25% is considered moderately stimulative in a weak economy; economists currently see the risks in Canada's economy as balanced. The central bank lowered the benchmark policy rate to 2.25% in October and has kept it on hold since.

"We think the Bank will stay on hold at this meeting and is likely to stay on hold through the end of the year," said Randall Bartlett, deputy chief economist with Desjardins.

The implications for inflation as a result of the oil shock are uncertain, Bartlett said, adding that it was too early for the BoC to react without first flagging the developing risks. In his last rate announcement, Governor Tiff Macklem stressed that it was difficult for the Governing Council to decide on the trajectory for monetary policy due to uncertain economic conditions and geopolitical risks.

Money markets are not pricing in a rate cut this year, and are betting on a 25-basis-point rate hike in December.

The BoC will announce its monetary policy decision at 9:45 a.m. EST (1345 GMT).

The war in the Middle East has sent oil prices soaring. The price of Brent crude oil has risen by more than 40% to $102.65 since the U.S. and Israel attacked Iran on February 28.

Canada, a net exporter of crude oil, is likely to benefit from higher oil prices, but the cost of gasoline will also jump, denting disposable income.

President Donald Trump's tariffs have also hit critical sectors, business investment has been weak, the labor market is soft and there is continued uncertainty around the three-country free trade deal review with the U.S. that Trump has frequently criticized. Mexico is also part of the deal.

Doug Porter, chief economist with BMO Capital Markets, said Canada's economy was still weak and there is a better case for a rate cut later in the year than a hike, saying higher oil prices should ease soon. He said he hopes Macklem does not come across as overly hawkish. The U.S. Federal Reserve will also announce its rates decision tomorrow. It is also widely expected to keep rates on hold. (Reporting by Promit Mukherjee)