Oil Price Surge Sends Markets Betting on Higher Interest Rates

Crude oil prices soared to over $100 last week due to escalating tensions between the US and Iran, sending market expectations for interest rate hikes surging.

According to National Bank of Canada strategists, a full hike was added to the outlook for the Bank of England and European Central Bank when oil prices jumped 30% in July.

Meanwhile, the odds of the US Federal Reserve increasing its rate this week rose to 40%, up from 10%, as price pressures mounted.

The Bank of Canada, however, has remained relatively untouched by this frenzy, with expectations of its policy rate in December rising just five basis points.

National Bank strategists noted that the relationship between oil prices and BoC policy expectations has weakened recently, while remaining strong elsewhere.

Energy prices do matter to Canada, but are currently being overshadowed by domestic developments such as a 'somewhat dovish' central bank decision this month, cooler inflation data, and Donald Trump's renewed tariff threats.

As a result, expectations of a rate increase in the near term remain low, but markets imply that the BoC could deliver more tightening than any other advanced economy next year.