Here's how the Iran conflict is expected to impact Canada's economy and the BoC's path

Canada’s mortgage market faces another geopolitical shock as the Iran war pushed oil prices higher and revived inflation worries. Despite that, Oxford Economics judged the hit to the Canadian economy – and by extension mortgage rates – would likely remain contained if the conflict stays short-lived.

In its latest view, the firm said it has only tweaked its forecast in response to the war.

“Our current baseline forecast assumes a short-lived conflict, where the war temporarily increases global energy prices and adds about 0.2ppts to Canada’s headline CPI inflation in Q2 & Q3 2026,” said Tony Stillo, director of Canada economics at Oxford Economics.

Oxford Economics now forecast headline CPI inflation will average 2.5% in 2026, up 0.1ppt from last month, but still predict inflation to slow to 2% in 2027.

“On a quarterly basis, we expect headline CPI inflation to temporarily rise to 2.7% on average in Q2 2026, before easing to 1.9% y/y by Q2 2027.”

He added that “meaningful pass-through from higher global energy prices to core CPI is unlikely given excess slack in the Canadian economy, but that’s an upside risk the longer the war drags on.”

Bank of Canada seen on hold even as oil jumps

“We still expect the Bank of Canada will remain on hold for all of 2026,” Stillo said.

Similarly, 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.

Private‑sector forecasters also see policy rates staying at 2.25% this year as growth and inflation hovers near target. Markets earlier suggested they would look through an energy price spike unless conflict drags on for an extended period, limiting any sustained rise in bond yields and fixed mortgage rates.

Consumer resilience and limited upside for energy investment

“Our forecast for Canada’s GDP growth is unchanged at 1.1% in 2026 and 2.1% in 2027,” Stillo said.

“Overall, we don’t anticipate much of a hit to consumer spending from the fuel price shock in the near term because households are more likely to reduce savings instead. Moreover, Canada’s lower- and middle-income households will be supported by the new federal grocery and essential rebate in Q2, which should buoy overall consumer spending.”

Oxford Economics expects that a brief conflict and short‑lived rise in global energy prices would not trigger a major increase in Canadian oil and gas investment, given producers’ limited near‑term capacity to ramp up output.

However, it warned that a prolonged war and persistently elevated oil and natural gas prices could eventually spur higher sector investment to meet stronger global demand.

Source CMP
By Liezel Once