As widely anticipated, the Bank of Canada did not react to the situation surrounding the Strait of Hormuz, considering that the increase in oil prices is likely temporary and does not warrant immediate intervention. Furthermore, although the high level of energy prices weighs on consumption, its impact remains less pronounced than during the oil shocks of the 1970s.
Inflationary fears, albeit temporary, have pushed bond interest rates to the highest level in almost 2 years. This explains the rise in fixed mortgage rates observed in recent weeks, as illustrated in the graph below.
To view this graph in full size, click here.
The current geopolitical situation is lasting longer than anticipated. Even when ship traffic resumes in the Strait of Hormuz, several quarters will be needed to regain the balance observed before the conflict began. For this reason, the outlook indicates that oil prices, and more broadly commodities, are likely to remain high for longer.
These inflationary pressures are pushing back expectations of a reduction in the key rate for the remainder of the year in the United States. Similarly, this environment also limits the Bank of Canada’s room for maneuver in pursuing a short-term rate cut cycle.
Should we fear a rise in rates?
While some economists mention the possibility of rate hikes in Canada next year, we do not endorse this scenario at the moment.
Immigration restrictions led to a decline in the Canadian population last year, reducing pressure on the labor market and helping to stabilize the unemployment rate, despite moderate job growth.
Furthermore, the impact of artificial intelligence on employment is expected to result in disruptions, job transformation, and efficiency gains. In the medium term, these productivity gains, combined with some job losses, could exert disinflationary pressures and increase the likelihood of monetary policy easing by institutions such as the Bank of Canada.
This is why a potential easing of monetary policy in the United States, especially in the context of a change in leadership at the Federal Reserve, could indirectly pressure the Bank of Canada to continue a cycle of rate cuts. As mentioned earlier, we believe this factor could influence the direction of rates in Canada.
In this uncertain context, it is more important than ever to consult a mortgage broker to determine which option, between a variable mortgage (fixed or adjustable payment) and fixed mortgage (short or long term), best suits the needs of clients.
Managing liabilities is often the most critical part of a client’s financial situation. It is therefore crucial to entrust the analysis to an objective professional who can guide the client and help them fully understand their value. After all, isn’t managing liabilities just as important as managing assets?
