April 1, 2026 -- Iran War, Oil, and Interest Rates
Fixed rates are now close to half a percent higher than they were prior to the Iran war. This is entirely due to the investors speculating that the rising price of oil will cause inflation, which is certainly correct, but what will really matter is the duration of the conflict, and in particular, the amount of time it takes to allow oil bearing vessels to begin travelling safely through the Strait of Hormuz.
The price of oil affects the cost of shipping, transportation, manufacturing, agriculture, plastics, tourism, and more, so when the price of oil goes up, the price of almost everything goes up. This causes inflation.
Government of Canada bond yields are the basis for fixed Canadian interest rates. Why fixed interest rates go up when the price of oil goes up is because investors sell their bonds for the reason that higher inflation lessens profit on bonds. This then causes the yields on the bonds to rise in order to entice more buyers because higher yields provide higher profit from the bonds. Since fixed rates are measured against Government bond yields, fixed rates rise as a result.
If the war in Iran is indeed close to ending, as the Trump administration is claiming, the rise in fixed rates will be temporary. Once the price of oil falls, government bond yields will fall, and so will fixed interest rates, due to Canada's failing economy.
Unlike fixed rates, the variable rate is measured against the Bank of Canada's policy interest rate. When the Bank of Canada raises the policy rate, variable rates rise, and vice versa. The Bank of Canada meets eight times per year to decide whether to raise, lower, or maintain the overnight rate.
The two main factors the Bank of Canada considers when determining the policy rate are inflation and economic growth. When the economy is growing at a fast pace, inflation is likely to rise in the future, so the Bank will raise rates pre-emptively in order to stop inflation before it happens.
At the moment the Canadian economy is performing terribly, with no foreseeable sign of improvement, so if it were not for the war in Iran, fixed rates would likely continue their downward path, and the Bank of Canada would likely lower rates in future meetings. A failing economy causes less household spending, which lessens the demand for goods, which lowers inflation.
This being said, the Bank of Canada is in a tough position due to the Iran war. If they raise the policy rate, it will slow the economy further and lead us into a deeper recession than the one we are likely entering into, but if the war in Iran is prolonged, and the price of oil stays elevated for a long enough period of time, causing longer term inflation, the Bank of Canada may have to raise rates slightly to slow inflation.
Variable rates are currently much lower than fixed rates, so even if the Bank of Canada were to raise the overnight rate by 0.50% to calm future inflation (which is a large increase for them) the rate will still be below the current fixed rate, and if they do raise the rate by this amount, it will very much reduce economic growth in Canada.
The Bank of Canada today released their Summary of Governing Council Deliberations, which echoed much of what I have written above. Some notable points made by the Bank in its publication were:
“The war in Iran had clearly added a new layer of uncertainty, but they agreed that they should not lose sight of the other risks already facing the economy: shifting US trade policy, the upcoming review of the Canada-United States-Mexico Agreement, and ongoing structural changes”.
“Typically, higher inflation expectations make it easier for businesses to pass along cost increases. But when the economy is soft, firms often look for ways to avoid raising prices so that they don’t lose customers. Similarly, upward pressure on wages is less likely in a weak economy”.
“Governing Council members believed it was too early to assess the impact on the outlook and how these risks would materialize. They therefore agreed to hold the policy interest rate unchanged at 2.25%.”
If you are in a variable rate and concerned about the chance that your mortgage payment will rise, please call or email me to discuss options.
Although it is my opinion that remaining in a variable rate will save borrowers the most money going forward, there is no guarantee that the war will end quickly and the price of oil will fall to pre-war levels in the near term.
March 18, 2026 -- No Change by the Bank of Canada, Iran War, Oil, and Mortgage Rates
Due to a recent spike in the price of oil as a result of the Iran war, the Bank of Canada held their key interest rate steady this month, meaning there will be no change for mortgage borrowers in variable rate mortgages.
There was possibility of a rate cut this month due to the recent inflation statistics showing Canada’s inflation level at 1.80%
The Bank of Canada stated in their meeting that they are trying to weigh the difference a spike in oil prices will have between Immediate vs. long term inflation.
If the conflict ends quickly, or if shipment of oil though the Strait of Hormuz returns to previous levels, then the impact the war will have on inflation will be short term and minimal, but if the conflict persists and oil is not able to flow freely through the Strait of Hormuz, it could have a long term impact on inflation.
From an immediate inflation perspective, corn and wheat futures prices have been fairly stable since the beginning of the Iran war, so currently, rising oil prices do not seem to be putting very much upward pressure on food prices and are mostly just affecting gasoline prices.
The chart in this article illustrates the large spike in oil prices compared with the extent of the rise of the 5 year Government of Canada bond yield, which is the basis for 5 year fixed mortgage rates in Canada. You can see in the chart that the yield has not risen by nearly the same degree as the price of oil.
Unfortunately, oil is priced globally rather than regionally, which is why we are seeing such a large spike in prices in Canada, even though only a small percentage of our oil is imported from the Middle East.
About Monday’s Inflation data release
Canada’s annual rate of inflation fell from 2.30% to 1.80% according to statistics Canada on Monday.
Food inflation remained uncomfortably high at 5.40%, and items related to health and personal care were slightly high at 3.50%, however inflation on items such as shelter, household goods, clothing and footwear, as well as recreation and reading, all came in below 2.00%.
Much of what has brought inflation down over the past year has been a drastic decrease in energy prices of 9.30%, with gasoline prices being the largest contributor with an annual decrease of 14.20%.
This fall in energy prices however will be offset in future data releases by the rise in oil prices caused by the Iran war. The price of oil rise by almost 50% from it's pre-war level at the time of writing this article. The price has fallen substantially since it peaked at close to $120 per barrel on the second weekend of the conflict, now sitting at just under $100 per barrel.
Despite the rise in oil prices which is temporarily causing fixed rates to rise, it is unlikely that the Bank of Canada will raise rates any time soon due to the terrible state of the Canadian economy.
Canada's Weak Employment
Canada’s economy saw a contraction of 0.60% for the fourth quarter of 2025, illustrating the decline in economic growth. Unemployment rose dramatically in February as Canada lost 84,000 jobs in just one month.
The U.S. economy is also slowing and experience rising job losses. A slowing U.S. economy reduces demand for Canadian goods and services, which will cause further slowing to the Canadian economy.
March 3, 2026 - War in the Middle East, and Fixed Mortgage Rates
Government of Canada bond yields have been on what seems like a roller coaster ride over the span of this week due to events taking place in the Middle East.
The price of oil generally has a significant impact on inflation since it affects the cost of production, shipping, and transportation. Due to its impact on inflation, government of Canada bond yields often mimic the price direction of oil, which is the reason for the yields’ behaviour this week.
At the time of writing this article, we have not seen increases in fixed rates with any of our lenders, however fixed rates may rise slightly in the days ahead, but the rise will likely be small and temporary.
Normally when conflicts occur in the Middle East, a temporary rise in the price of oil occurs, just like we are seeing this time, and after the conflict seems to be settled or under control, the price of oil falls back to previous levels.
Our mortgage lenders have not priced in the full amount of decrease we have seen in bond yields since December’s better than expected jobs data, which in a sense, fooled investors into thinking Canada’s job market had been expanding, when in fact it was almost all part time and temporary jobs that were created.
The lack of decrease in rates compared with bond yields over the past two months gives the lenders room for the yields to rise slightly before needing to raise rates.
The chart above illustrates the path of the 5 year government bond yield over the past couple of days. Overall, there yield had risen a total of about 21 basis points since the weekend but has come back down showing a total increase of 12 basis points for the week, which would only be enough to make fixed rates rise by about 12 basis points overall (or 0.12%).
U.S. president Donald Trump stated today that, “If necessary, the United States Navy will begin escorting tankers through the Strait of Hormuz, as soon as possible. No matter what, the United States will ensure the free flow of energy to the world”. Since the factor which has caused yields to rise is the possibility of a short term disruption in the supply chain of oil from the Middle East, allowing the tankers to continue to reach their destinations will ease concerns about oil prices.
