History suggests limited impact on rates even as oil prices spike amid geopolitical tensions
As tensions rise in the Middle East following Israeli and US strikes on Iran, Canadians are watching closely for ripple effects that could hit their wallets, especially when it comes to mortgage rates.
With Canada and the European Union calling for restraint and a diplomatic solution following US strikes on Iranian nuclear facilities, the concern now shifts to how rising oil prices, often an outcome of war in oil-producing regions, could influence inflation and, by extension, Canadian mortgage rates.
Historically, military conflicts in the Middle East tend to send oil prices surging, which in turn pushes inflation higher. That inflationary pressure can make it difficult for central banks to justify rate cuts, or worse, force them to keep rates higher for longer.
Robert McLister, a mortgage strategist and interest rate analyst, points out that previous oil-related military conflicts offer limited precedent for what might happen next.
During the 2003 Iraq War, for example, West Texas Intermediate oil futures surged as much as 61%, yet Canada’s benchmark prime rate only rose by 50 basis points, and five-year fixed mortgage rates remained flat.
In the Gulf War of 1990-91, oil prices more than doubled, but Canada’s prime rate actually fell by 350 basis points, and average five-year fixed rates dropped by more than 260 basis points.
The common threads in these episodes? Oil prices spiked and inflation ran hot for a time, but there were “no major upside moves in mortgage rates,” McLister said. “So, even with WTI crude jumping 27 per cent this month, odds are the market will look through this energy price spike.”
While short-term inflation worries could push bond yields and fixed mortgage rates slightly higher, a sustained surge in rates is not considered likely unless the conflict drags on for months or years.
“For that to happen, Canada’s five-year government yield would have to punch above three per cent. Chart watchers say that’s a decent bet,” McLister added. “So, if you’re mortgage hunting, keep one eye on the yield chart—and the other on your rate hold expiry.”
Read next: Sluggish retail sales keep Bank of Canada rate cuts on the table
On variable rates, most forecasters see little chance of increases in the near term. With Canada’s economy still feeling the effects of trade tariffs and slowing growth, no forecasters are betting on hikes. However, if inflation remains persistently high, planned rate cuts could be delayed.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
