As widely anticipated, the Bank of Canada did not react to the situation surrounding the Strait of Hormuz, deeming the rise in oil prices to be likely temporary and not justifying immediate intervention. Furthermore, while the high level of energy prices weighs on consumption, its impact remains less pronounced than during the oil shocks of the 1970s.
Temporary inflationary fears have pushed bond interest rates to the highest level in almost 2 years. This explains the increase 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 rate cut by the end of the year in the United States. Similarly, this environment also limits the Bank of Canada’s room to maneuver in pursuing a short-term rate cut cycle.
Is there a need to fear a rise in rates?
Although some economists mention the possibility of rate hikes in Canada next year, we do not subscribe to 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 modest employment growth.
In addition, 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 like the Bank of Canada.
Therefore, a potential easing of monetary policy in the United States, especially in a context of change at the head of 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 a fixed mortgage (short or long term), best suits the needs of clients.
Managing liabilities often constitutes the most important part of a client’s financial situation. It is 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 as important as managing assets?
