Crude oil prices are pushing headline inflation higher just as the Bank of Canada prepares its rate decision, and most economists expect a hike. We see energy inflation as the driver, and the risk is stagflation for the Canadian economy. Click here to listen to the full interview.
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Energy Is Leaking Into the Broader Canadian Economy
Energy inflation is a factor in the Bank of Canada decision. Oil is lifting headline inflation, while inflation excluding energy and food remains more subdued, and the Canadian economy is relatively soft. The full impact of the latest U.S. tariffs may still be ahead, which leaves the central bank weighing a tighter policy stance against a slowing economy.
We read a hike as a signal that the bank sees energy costs beginning to leak into the wider economy, and that rates could stay higher for longer. A hold would suggest the bank is waiting for more data and is wary of weakening growth further. Either way, the decision carries weight, because as CIBC’s Chief Economist Avery Shenfeld says, a rate hike is like a potato chip: you can’t have just one.
Complacency Is Fading From the Oil Price Outlook
Clients across the industry told us the word that kept coming up was complacency, and that view is starting to wear off. The average forward price for Brent in 2027 is in the mid-$90s, which indicates that the market is beginning to price in a longer disruption. International Energy Agency head Fatih Birol has also said the situation is unlikely to improve next year.
The conflict looks more persistent than the market first assumed, and clients are starting to accept that. This shift is moving into market expectations, and it means geopolitics-driven supply risk is no longer treated as a short-lived event. Our view is that price expectations will keep adjusting as the duration of the disruption becomes clearer.
Geopolitics: Peace Versus Escalation Ahead of the U.S. Midterms
U.S. midterms are on Tuesday, and President Donald Trump has signaled that a decision is near: a peace deal or an escalation of hostilities. Warnings have gone out to Gulf nations that a strike may occur, and energy infrastructure is a clear target. Reports that Saudi Arabia offered the Houthis $1 billion to stop attacks did not prevent a strike on a refinery, which suggests that option is off the table for now.
If the war escalates, we expect energy assets to be targeted and prices to rise. If a deal emerges, we would expect an immediate sell-off, followed by fundamentals taking over. Inventories would still need to be rebuilt after a disruption, so the price floor after a peace deal is likely to be firmer than the headline reaction suggests.
Pipelines, Redundancy and Canada’s Tanker Ban Debate
U.S. Treasury Secretary Scott Bessent has said pipelines could make the Strait of Hormuz irrelevant within a couple of years. We see some truth in that, since new pipelines add redundancy and Saudi Arabia wants to expand its takeaway capacity as does the UAE. However, if a disruption lasts that long, demand would adjust first, which makes the outcome a painful way to make the strait irrelevant.
Closer to home, a majority conservative government in British Columbia has prompted calls to repeal the North Coast tanker ban, both federally and from Alberta. We question the timing, since the Pacific link is already built and the first priority is filling that pipeline and attracting investors. Adding another project would bring political implications that the industry will need to weigh carefully.
Top Three Takeaways:
1: Why could a Bank of Canada rate hike signal stagflation?
A hike would indicate that the bank sees energy inflation spreading into the broader economy, which raises inflation at the same time growth is weak. That combination of weak growth and high inflation is the stagflationary risk we are watching.
2: What would it mean if the Bank of Canada holds rates?
A hold would suggest the bank is waiting for more data and is concerned that raising rates could further weaken an already soft economy. It would not remove the energy-driven inflation pressure, so the decision would still depend on how the next readings develop.
3: What could move crude oil prices most in the coming weeks?
The outcome of the U.S. decision on peace or escalation is the largest near-term factor. Escalation would likely target energy infrastructure and lift prices, while a peace deal would likely trigger a sell-off before fundamentals reassert themselves.
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