As oil prices ease, expectations that the Bank of Canada may hike interest rates are cooling down.
Bond swaps markets, which capture investor sentiment around monetary policy, are currently pricing in just over a 50-per-cent chance of a quarter-point rate hike by the end of 2026, according to Bloomberg data. It’s a marked change from recent months when markets were pricing in expectations of up to two rate hikes this year.
A major reason for the reversal is the recent drop in oil prices, which is leading economists to believe that the worst of inflation from the war in Iran is past us.
Inflation rose to 3.1 per cent in May, according to the latest Consumer Price Index report from Statistics Canada, released earlier this week. But economists from multiple banks were unconcerned, saying that the spike was largely owing to energy prices that are now tapering off.
“Oil prices are down significantly since a tentative peace deal between Iran and the U.S. was reached, and gasoline prices have been following suit,” wrote Leslie Preston, managing director and senior economist at TD Economics, after the CPI report was released.
“We expect May to mark the peak for headline inflation this year.”
While the Bank of Canada standing pat on interest rates will directly shield variable mortgage holders from higher monthly payments, it may not have a notable effect on fixed-rate mortgages, which are instead affected by movements in the bond market.
The Canada five-year bond rate, which is the most important indicator for fixed mortgages, remained at an elevated level above 3 per cent as of Thursday afternoon.
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