Geopolitical tensions push back the decline in interest rates

The Bank of Canada has not reacted to the situation surrounding the Strait of Hormuz, deeming the rise in oil prices to be likely temporary and not warranting immediate intervention. Although the high level of energy prices impacts consumption, its effect is less pronounced than during the oil shocks of the 1970s.

Fears of temporary inflation have driven bond interest rates to their highest level in almost two years, leading to an increase in fixed mortgage rates in recent weeks, as depicted in the graph below.

The current geopolitical situation is lasting longer than expected. Even when ship traffic resumes in the Strait of Hormuz, several quarters will be needed to regain the balance observed before the conflict began. As a result, indications suggest that oil prices, and raw material prices more broadly, are likely to remain elevated for longer.

These inflationary pressures are pushing back expectations for a decline in the benchmark rate for the rest of the year in the United States. In the same vein, this environment also limits the flexibility of the Bank of Canada (BoC) to continue 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 subscribe to this scenario at the moment.

Restrictions on immigration led to a decline in the Canadian population last year, easing pressure on the labor market and helping to stabilize the unemployment rate, despite modest job growth.

Furthermore, the impact of artificial intelligence on employment is expected to result in disruptions, transformation of roles, and efficiency gains. In the medium term, these productivity gains, combined with some job losses, could exert deflationary pressures and increase the likelihood of monetary policy easing by institutions like the BoC.

Therefore, a potential easing of monetary policy in the United States, particularly in the context of changes at the helm of the Federal Reserve, could indirectly pressure the Bank of Canada to continue a rate cut cycle. As mentioned earlier, we believe this factor could influence interest rate trends 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 its analysis to an objective professional, capable of guiding the client and fully explaining its value. After all, is managing liabilities not just as important as managing assets?