Lower Oil Prices Reduce Market Expectations of Central Banks Rate Hikes, Including Canada, Says BMO

Many fixed-income markets have been "rigidly" trading almost tick-for-tick with oil prices since the Iran conflict began, said Bank of Montreal (BMO).

In turn, this implies that markets had been pricing in much higher odds of rate hikes in a variety of economies,

including the United States and Canada, until now, noted the bank.

While not completely washed away just yet, the pullback in oil is steadily grinding down those rate-hike expectations as broadly captured by two-year Government of Canada (GoC) bond yields, stated BMO.

The bank's view is that those rate-hike expectations should eventually fully be erased, at least in Canada, should oil prices stay down. Gross domestic product and hours worked have both dropped over the past year, core inflation is on target at 2%, and USMCA trade review uncertainty lingers.

That's no environment for rate hikes, added BMO.