Russia is among the world’s largest producers of oil, natural gas, aluminum and grain. The price of oil has been well above US$100 in the past few days and came close to US$114 in London on Wednesday.
The prices of aluminum and natural gas are reaching peaks in Europe. And wheat prices are at record highs since 2008 because Russia and Ukraine supply almost 30% of wheat exports.
This will drive up inflation around the world, and the adverse effects on confidence as well as further supply disruptions could weigh on global growth
says the Bank of Canada.
Even more inflation
There will be real effects for consumers. First, the rise in oil prices could push the price of gasoline close to $2 per liter in the ordinary. We’re already at $1.75 in some places. A barrel approaching US$150 would take gas prices to a new historic plateau.
Then, prices at the grocery store, where inflation is already marked, could also increase. The price of wheat is approaching US$11 a bushel on the Chicago Resource Exchange, its highest level since 2008. The price of wheat is up 40% for a month and 60% for a year.
Not only could Russia reduce its exports, but the war would prevent Ukrainian producers from proceeding with their wheat and maize crops.
This surge in inflation is, without a doubt, the most important economic effect for Canadians. This will be the most marked negative effect. In terms of trade, the impact will be modest. Canada has not developed a deep commercial relationship with Russia over time.
In 2019, trade transactions between the two countries amounted to $2.5 billion. Of this sum, there were 666 million in exports to Russia. The grand total of Canada’s international exports is close to $600 billion.
Yes, there are going to be industries or people who are going to be affected, said Justin Trudeau on Wednesday morning. We will see what we can do to compensate for the losses of companies that are affected by the ban on exports to Russia.
This effect will be minimal. Even the rise in the prices of resources, basic products, raw materials, such as energy and aluminum, could ultimately benefit the Canadian economy.
More rate hikes
So, for the first time since October 2018, the Bank of Canada is raising its key rate from 0.25% to 0.5%. The objective is to try to calm inflation, which exceeds 5% in the country.
Economic growth was stronger than expected at the end of 2021 and growth in the first quarter of 2022 will be stronger than expected, according to the institution, since the effects of the Omicron variant on the economy fade more quickly than expected
This economic growth and the stronger-than-expected rise in inflation should prompt the central bank to raise its key rate more quickly. But the war in Ukraine could quickly slow the rise in START. And, out of caution, the central bank could be tempted to tone down its program of rate hikes.
Already, the Bank of Canada has decided to maintain its government bond buyback program. These investments were important during the pandemic to finance government support for the population. It does not yet plan to let its bond portfolio begin to shrink.
In the United States, Federal Reserve Chairman Jerome Powell indicated his intention to propose a 0.25 point increase in the key rate in two weeks when the Fed governors meet, in view of the announcement of the key rate on March 16.
Despite the war in Ukraine, Jerome Powell is planning a series of rate hikes to try to start easing inflation to 7.5%. But it is too early, he says, to fully understand the effect of the sanctions against Moscow and the impact of the war on the global economy. The repercussions are highly uncertain, he said.
And your mortgage?
In the wake of the Bank of Canada’s key rate hike, financial institutions announced a 25 basis point increase in their prime rate. This new rate is already in effect. It will lead to a rise in the variable rate and an increase in the share of interest paid by borrowers.
As for fixed rate borrowers, the increase will be felt at the time of renewal. On a $500,000 mortgage, 25-year amortization, 5-year contract, at 1.5% interest, the payment is currently $1,999.
It would rise to $2057 on a 1.75% rate, which is $58 higher. At 2.5%, the increase in mortgage costs would reach $258. At 3%, we would have reached an increase of $367. And at 4%, the monthly cost increase would reach $631.
In fact, the scenario that is emerging is worrying. The war in Ukraine and the economic sanctions against Russia will further fuel the rise in the cost of living. Another inflationary shock is to be expected.
According to Jean-François Perrault, chief economist of Scotiabank, who was at Economy zone Wednesday night, the inflation rate in Canada could go from 5.1% right now to 6.5%, or even 7% soon.
It’s a temporary, momentary level of inflation that should come down by the end of the year and into 2023. But, in the meantime, this inflationary surge could encourage central banks to stay the course for a sustained rise. interest rates.
Not only will consumers’ wallets be strained by price increases, but mortgage costs could escalate rapidly. However, according to an Angus Reid poll, a quarter of Canadians fear rate hikes and the effect on their finances.
With the collaboration of Andrée-Anne St-Arnaud.
In a previous version, the explanation for mortgage cost increases was erroneously identified as the variable rate. Rather, it was the fixed rate. I made the correction. My apologies – Gérald Fillion
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