MMM: The forever war nobody's pricing in yet
The recent escalation between the United States and Iran has largely faded from the headlines—but that doesn't mean the risk has disappeared. In fact, it may be one of the biggest macroeconomic stories that isn't getting enough attention.
After nearly a week of renewed military exchanges, a brief ceasefire lasted only days before breaking down. While markets have reacted to each new development, the larger question remains: What happens if this conflict becomes a long-term reality rather than a short-term event?
Why This Matters
One of the biggest concerns is the Strait of Hormuz, a narrow waterway controlled by Iran through which roughly 20% of the world's oil supply passes.
When tensions rise in the region:
Oil tankers may delay shipments.
Insurance costs for shipping increase.
Global oil prices often rise.
In a prolonged supply disruption, some economists estimate that West Texas Intermediate (WTI) crude oil could climb as high as $167 per barrel. While that's a worst-case scenario, even the possibility of supply interruptions can put upward pressure on energy prices.
Higher Oil Prices Affect More Than Gas
A spike in oil prices doesn't simply mean paying more at the pump.
Transportation costs increase, making it more expensive to move products across the country and around the world. Those higher costs can eventually filter into:
Grocery prices
Consumer goods
Manufacturing
Shipping and logistics
In other words, sustained increases in oil prices can contribute to broader inflation across the economy.
Markets Are Watching—But Are They Looking Far Enough Ahead?
Financial markets have certainly noticed the conflict.
Bond yields have moved sharply with every announcement of a ceasefire and every renewed escalation. Treasury yields and mortgage-related bond yields have reflected that uncertainty for months.
However, markets still appear to be treating this as a conflict that will eventually resolve.
The bigger risk is a scenario where elevated geopolitical tensions become the new normal. If higher oil prices persist for years rather than months, inflation could remain more stubborn than many currently expect.
We've already seen how lasting geopolitical events can reshape prices. The Russia-Ukraine war contributed to permanent increases in many food costs that consumers continue to feel today.
What Does This Mean for Mortgage Rates?
This doesn't necessarily mean everyone should rush into a fixed-rate mortgage.
But it does highlight an important point: your mortgage strategy shouldn't be based solely on what the Bank of Canada might do over the next few months.
The more important question may be:
What does inflation look like over the next two to three years?
If inflation remains elevated because of persistent global supply pressures, interest rates may also stay higher for longer than many expect.
Looking Ahead
Another important question is how a prolonged period of higher oil prices could interact with Canada's slowing economy. That's a complex topic—and one worth exploring in more detail.
For homeowners approaching a mortgage renewal, these broader economic trends deserve just as much attention as the next Bank of Canada announcement.
If your mortgage is renewing before the next Bank of Canada rate decision, now is a good time to review your options and understand how today's global events could affect tomorrow's borrowing costs.
