Standing ready

Hantavirus scare. A new Ebola outbreak. Oil surging again. The Habs losing to (choke) Buffalo. What else? Locusts?

Actually we’re just a day away from the next big stink. At least in the world of finances, bank policy and your mortgage rate.

Remember that awful inflation surge reported in the US a few days ago? The one that the president said he didn’t care about, as he loaded up Air Force One with tech billionaires for a nice dinner in Beijing?

Well, it’s coming here.

Not so long ago inflation in Canada was 1.8%. Then it travelled to 2.4%. If some economists are correct, on Tuesday the number could rocket to 3.5%.

So what?

It matters because for a few years now then cost-of-living increase has been contained within the Bank of Canada’s target range of 1-3%. That allowed interest rates to fall for a while, then go on hold. For the last four of its rate-review dates, the CB has kept the rudder steady at 2.25%.

But wait. A central bank rate of 2.25% would be significantly lower than an annualized inflation rate of 3.5%. So, in effect, we’d have negative interest rates. Indeed, there are a few five-year, variable-rate mortgages currently available at three-and-a-half or less.

Uh-huh. Free money. Again. Precisely the thing that helped real estate become an asset of choice when the central bank tried to deal with a pandemic.

As for savers, this is dire news. In order to beat an inflation number of 3.5% you must sign up for a GIC of five years with an outfit that turns around and uses your money to fund dodgy reverse mortgage[s for confused old people. No glory there.

Scotia’s Derek Holt warns of “a sharp acceleration that may challenge the Bank of Canada’s narrative.” (Our guys said in a worst-case scenario this year inflation would top out at 3%. Oops.)

“I’ve estimated that CPI will rise by 1% m/m seasonally unadjusted (NSA), or about 0.9% m/m SA. That would be enough to raise the year-over-year rate to 3½%,” says Holt. “This could mean that Canada experiences a surge of inflation pressure much like what the US saw this past week when CPI jumped to 3.8% y/y and core CPI increased to 2.8% y/y. More lies ahead.”

How much more is clearly unknown.

Trump’s War ain’t going well. The trip to China didn’t help. Iran has gained a ton of sympathy among other nations that Trump has unfairly tariffed, cut off humanitarian aid to or, in seven instances, attacked since he came to office a year and a half ago. He has slighted Europe. Insulted Canada. Threatened Greenland. Starved Cuba. And spent $30 billion on a conflict that’s accomplished nothing good, created a global energy crisis and, yes, will give us that 3.5% inflation announcement on Tuesday.

Oil rocketed past $100 a barrel again last week, and futures indicate Mr. Market expects crude to be selling for over $82 even a year from now – a huge premium over pre-war pricing. Wells have been damaged. Refineries have been hit. LNG facilities bombed. And control of the pivotal Strait of Hormuz may never again be certain nor navigation through it secure.

In short, higher prices could be a new normal. Fertilizer costs have doubled, so food will become more dear. Futures pricing of aluminum is up 22%, copper 15%, soybeans 14% and live cattle 9%. Last week we heard producer prices in the US surged 6%, in line with what happened when Covid hit.

Adds Holt: “Most econometric models in Canada don’t even include the effects of non-energy commodity prices and are thus wearing horse-blinders when it comes to evaluating these effects which is an important point to recall when considering their outputs for growth, inflation, incomes, rates etc.”

The Bank of Canada next reviews its rates June 10th. Expect another hold.

After that, things get furrier. If Trump loses his mind and sends ground troops into Iran, oil prices could rocket further. With 70% of its missile and drone capacity intact, and a million people in uniform, Iran will be no pushover. The odds of this scale of conflict have to be low.

Even without that insanity, months more of a restricted global energy supply will help embed inflationary expectations. That’s when central banks usually move to corral it. The best-case scenario for Canadian rates is a pause for the rest of the year.

But after that?

Recall what Gov’nr Tiff said last time: the bank “is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed. The Bank is committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.”

Happy 2-4.

About the picture: “WUL here. In response to your clarion call for dog pics, this is Finn, a Brittany Spaniel at the age of 14 and ½ years,” writes Kurt. “He was owned by my sister and her partner. I was blessed to be able to baby sit him when his owners were out of town. At the age of 15 years he would run all day happily in the autumn yellow grass in southern Alberta  to flush pheasants. For little reward. I hope he makes the centerfold of your valued blog.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2026/05/17/standing-ready/