On the Radar: A Peace Deal Sent Oil Prices Tumbling but the Fed Still Signaled Higher Rates. What Does It Mean for Canadian Mortgage Rates?

Economic insights
Jun 19, 2026

First National Financial LP

Quick Takes:

The United States and Iran reached a deal over the weekend to end the war and reopen the Strait of Hormuz within 30 days, sending Brent crude below $80 per barrel for the first time since February, with the signing ceremony set for Friday in Switzerland.
Despite the deal, the Federal Reserve held at 3.50% to 3.75% on Wednesday, with nine of 19 officials now signaling at least one rate increase by year-end, up from zero in March, and just one expecting a cut, down from 12.
The Fed raised its median core inflation forecast to 3.3% from 2.7%, reflecting the AI boom as a second inflation driver alongside energy, while Chairman Warsh stripped the FOMC statement to 132 words from 345 in April and declined to submit his own dot plot projection.
For Canadian mortgage rates, the two stories pull in opposite directions: falling oil could give the Bank of Canada room to cut and bring variable rates down, but the Fed’s hawkish shift keeps U.S. Treasury yields elevated, putting a floor under fixed rates.

Two of the biggest forces acting on Canadian mortgage rates moved in opposite directions this week. Over the weekend, the United States and Iran announced an initial deal to end the war and reopen the Strait of Hormuz, sending oil prices tumbling. On Wednesday, the Federal Reserve held rates but signaled that hikes, not cuts, are the committee’s next most likely move.

The peace deal is the first real relief on the inflation front since the Strait closed in February, with Brent crude falling below $80 per barrel for the first time in four months. But the Fed’s hawkish turn, driven in part by AI-fuelled demand that has nothing to do with oil, means U.S. Treasury yields are staying elevated and pulling Canadian bond yields up with them.

A Peace Deal and Falling Oil

Over the weekend, the United States and Iran reached a framework agreement to end more than three months of fighting and reopen the Strait of Hormuz. The 14-point memorandum of understanding commits both sides to a permanent end to military operations and requires Iran to reopen the Strait within 30 days. A signing ceremony is set for Friday in Switzerland, with Pakistan as mediator.

Oil markets moved quickly on the news. Brent futures fell below $80 per barrel for the first time in over four months, after trading well above that level since the Strait closed in February. However, full oil flow could take weeks or months to restore as Gulf producers bring throttled-back production online and shippers rebuild confidence in the waterway.

For Canada, the oil price drop is significant because energy has been the main driver of the inflation that has kept the Bank of Canada from cutting rates. Canadian headline CPI reached 2.8 percent in April, up from 2.4 percent the month before, driven almost entirely by gasoline. If pump prices fall over the summer, that reading should come down and give Governor Macklem the room he needs to move.

The Fed Signaled Hikes Anyway

Despite the peace deal, the Federal Reserve held its benchmark rate at 3.50 to 3.75 percent on Wednesday in a unanimous vote at Chairman Kevin Warsh’s first meeting. “We have the capability and commitment to deliver on our price stability objective,” Warsh said at his first press conference as chairman. “That’s exactly what we’re going to do.”

The dot plot told the bigger story. Nine of 19 officials now see at least one rate increase by year-end, up from zero in March, while just one still expects a cut, down from 12. The median year-end rate rose to 3.75 percent from 3.4 percent.

Wednesday’s projections cap a remarkable reversal. In September 2024, the Fed began cutting rates from their two-decade high, lowering them six times before pausing at the end of last year. Twelve officials expected more cuts as recently as March, and now nine expect the opposite.

That hawkish shift reflects a view that falling oil alone will not solve the inflation problem. Officials raised their median forecast for core inflation in 2026 to 3.3 percent from 2.7 percent, driven in part by the AI boom, which has poured data centre construction and power-infrastructure spending into the economy. Even with oil prices dropping, the demand-driven side of inflation is keeping the Fed on guard.

Warsh also stripped the FOMC statement to 132 words from 345 in April, removed all forward guidance, and dropped the section disclosing how officials voted. He declined to submit his own dot plot projection, leaving only 18 submissions from 19 participants. At the April meeting, the statement drew four dissents, the most since 1992, and Wednesday’s decision completed the turn those dissenters had called for.

What This Means for Canadian Mortgage Rates

Variable rates could finally see some movement if the peace deal holds. Falling oil prices remove the biggest obstacle that has kept the Bank of Canada from cutting, since the overnight rate flows directly through prime to variable mortgage rates. If headline inflation drops over the summer, Macklem would have room to ease at the July 15 meeting or beyond.

Fixed rates face a different pressure entirely. Canadian lenders price fixed mortgages off GoC bond yields, and those yields take their cue from U.S. Treasuries. When nine of 19 Fed officials signal that a hike is more likely than a cut, it pushes Treasury yields higher and drags Canadian bond yields up along with them.

That keeps the floor under Canadian fixed rates in place even if oil prices continue to fall. The Fed’s core inflation forecast of 3.3 percent through year-end means U.S. Treasury yields are not coming down soon, regardless of what happens in the Middle East. As long as those yields stay elevated, GoC bond yields follow and fixed rates stay high.

What Could Change the Picture

The most important variable is whether the peace deal holds through the 60-day ceasefire and the 30-day window for Hormuz to reopen. If it does, oil prices could fall further, headline inflation would come down in both countries, and the Bank of Canada gets the room it needs to cut.

If the deal falls apart, oil prices would spike back up, the inflation picture reverts to where it was a month ago, and both central banks stay stuck. That risk is real because the memorandum leaves core issues unresolved, including Iran’s nuclear program and the mechanics of sanctions relief.

On the U.S. side, the Fed’s hawkish tilt could intensify if AI-driven demand keeps pushing core inflation higher even as energy costs fall. Warsh’s five task forces, reviewing the Fed’s communications, its $6.7 trillion balance sheet, and its inflation framework, add another source of unpredictability that markets will need to price through year-end.

Bottom Line

A peace deal and falling oil prices are the best news for Canadian mortgage rates in months, but the Fed’s hawkish turn in the same week limits how far that relief can travel. Variable rates may finally have a path to falling if the Bank of Canada cuts, while fixed rates remain under pressure from elevated U.S. Treasury yields.

For mortgage holders, the practical takeaway is to watch whether the peace deal holds, and oil prices stay down. Fixed rates need the Fed to change its mind, and nine officials just said that is not happening any time soon.

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