Residential Market Commentary - Iran War Heightens Worries

The Bank of Canada’s latest look at what consumers are thinking focuses on the Israel/U.S. war with Iran.

In a rare move the Bank conducted an additional “special survey” of consumers about a month after the February 28th start of the war.  The special survey was conducted between March 26th and April 2nd.  Not surprisingly consumer expectations did shift.  A key change came in expectations about inflation. 

The initial survey suggested consumer concerns about long term inflation had been easing.  The follow-up survey showed consumers expect the duration of the conflict to be a key driver of food and gasoline prices over the next 12 months. 

The Bank pays close attention to inflation expectations because they can turn into a self-fulfilling prophecy and actually fuel inflation.  That, of course, could lead to interest rate increases by the central bank. 

The inflation rate jumped to 2.4% in March, up from 1.8% in February.  The increase is attributed to higher fuel and food costs triggered by the war in Iran. 

Market watchers have mixed feelings about the Bank of Canada’s coming moves on interest rates.  Some expect as many as two increases by the end of this year.  Others, including the C.D. Howe Institute, say the Bank will hold at 2.25% until next year, then increase to 2.50%. 

The Bank of Canada’s next policy rate setting is scheduled for April 29th.