Middle East tensions pushed up oil, but rate relief still stays on hold
Canada’s latest oil-price scare put mortgage markets back on alert, as fresh conflict in the Middle East sent crude higher and revived questions over the Bank of Canada’s next move on rates.
New analysis from RBC Economics suggested that, for now, the shock looks more like a temporary jolt than a fundamental shift for the energy sector – and unlikely, on its own, to knock the central bank off its holding pattern through 2026.
RBC Economics framed the issue bluntly: “Ultimately, the economic impact of oil price changes depends crucially on what’s driving them.”
Geopolitically driven swings, they said, are “unlikely to be viewed as structural enough to reverse the decade-long decline in Canadian oil and gas investment.”
Without a new wave of capital spending, “the near-term impact on gross domestic product will likely be more neutral,” and the size and duration of the shock would matter more than the initial spike for the Bank of Canada’s reaction.
Oil, inflation and the rate path
The mechanics are familiar to policymakers. “When oil prices rise, consumers face higher prices at the pump almost instantly,” the RBC team said.
“As more dollars are allocated toward energy purchases, the buying power for other goods and services decline – and the longer prices remain high, the greater those challenges become.”
Yet higher energy prices also lift profits and royalties in producing regions, leaving the overall impact on growth “net‑neutral” for both Canada and the United States even as regional fortunes diverge.
Outside gasoline, “oil prices must remain elevated for months rather than days or weeks to cascade through supply chains and influence business pricing decisions,” RBC said – a key reason they expect only a modest, delayed inflation bump.
Their scenario work showed that if West Texas Intermediate held at about US$100 per barrel, headline CPI could peak “around 3% in Canada, and 3.5% in the U.S. this year,” roughly three‑quarters of a percentage point above RBC’s pre‑conflict Canadian forecast.
Why a higher oil bill may not move BoC
History also matters. The Bank of Canada cut rates by 50 basis points in 2015 when collapsing prices reflected a structural surge in US shale output. Today’s shock, by contrast, came from supply disruptions that markets still see as temporary – and from a North American energy system in which US production has climbed from 5.4 million barrels a day in 2004 to about 13.5 million in 2025, sharply reducing vulnerability to oil spikes.
Earlier this month, deputy governor Sharon Kozicki underlined that the Bank’s response to supply shocks “depend crucially on their size and duration,” with short‑lived moves typically inviting a “look‑through” approach.
RBC Economics echoes that stance, reiterating its call that the overnight rate – already at 2.25% after a long tightening‑then‑easing cycle – would likely stay there through the end of 2026.
Economists previously described a “wait‑and‑see” mortgage market built around a prolonged rate hold rather than a fresh tightening campaign, even as oil and other cost‑push pressures periodically flared.
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