Geopolitical tensions and rising energy prices are fuelling near-term inflation concerns, while investors look ahead to central bank decisions.
BNN Bloomberg spoke with Earl Davis, head of fixed income and money markets at BMO Global Asset Management, who said markets may be misreading the rate outlook as housing weakness and policy flexibility support the case for easing.
Key Takeaways
- Markets are pricing in a Bank of Canada rate hike, but the base case points to a potential rate cut instead.
- The U.S. Federal Reserve could cut rates once or twice as political pressure and easing inflation expectations build.
- Short-term inflation from energy prices is not a concern, but broader cost pressures could emerge within months.
- Canada’s growth outlook remains muted due to weak private-sector investment despite support from commodities and public spending.
- Housing weakness and upcoming mortgage renewals are key risks influencing Canadian monetary policy decisions.
Read the full transcript below:
ANDREW: Okay, there may be optimism about a settlement in the Persian Gulf. U.S. stocks are hitting record highs, but what about near-term economic data? Inflation is in for a spike, maybe short term, because of this surge in energy prices. Investors are turning their attention to central bank rate decisions that are forthcoming. Let’s get more from Earl Davis, head of fixed income and money markets at BMO Global Asset Management. Earl, thanks very much indeed for joining us.
EARL: Good morning. Always a pleasure to be here.
ANDREW: I know any kind of military situation is impossible to forecast, including for the generals, but we are going to get at least a short-term jump in inflation from this oil price surge.
EARL: Yeah, we’re for sure going to get — we’re already seeing it — the nominal jump in inflation just due to higher oil and gas prices in general. That’s not a concern to us. Usually, central bankers look through that. What we’re — I wouldn’t say concerned of — but what’s definitely on our radar is where inflation is in three to six months, not driven by oil and gas, but driven by higher transportation costs. We’re seeing that in airlines and airline fees. You’ll see that in packaging as well because of petrochemicals, and fertilizer coming through food. So for us, inflation would be more of a concern in, let’s call it, a six-month timeframe. And I believe that’s what people are waiting for. So right now, inflation is nominally high, but we’ll have to wait and see if there’s flow-through into core inflation.
ANDREW: Yeah, it’s interesting how this thing is just feeding through the entire industrial supply chain — plastic prices going up, fertilizers, you name it. You still think, though, that the U.S. Fed will cut rates once or maybe twice this year?
EARL: Yes, and that’s just political pressure coming about. And especially, they’ll cut if they do get the ceasefire, because at least people will say, “You know what? Inflation will not be sustainable — it will be transitory.” That’s to be proven, but they will have a window in which they could cut if there’s stability in regard to what’s going on with the Iran war.
ANDREW: What about Canada? You’re looking for muted growth, even though some commodities have done well?
EARL: Yes, muted private-sector growth. And that comes down to CUSMA — the uncertainty as to what the final new agreement will look like means businesses are still sitting on their hands. Having said that, we don’t see a recession or anything coming up, because what’s going to replace private-sector capital expenditures is actually public-sector capex through infrastructure and military procurement. So there’s a lot of public-sector support for the economy, as well as Canada being one of the biggest global beneficiaries of higher oil prices. There’s a direct positive impact on GDP. So there are a lot of reasons to say Canada will not go into a recession. However, growth will be muted because of private-sector spending and contribution to GDP.
ANDREW: I’m just looking at the headline here. Apparently, the Iranian foreign minister is saying that the Strait of Hormuz is declared completely open for all commercial vehicles for the remaining period of the ceasefire. So that will probably be seen as reassuring by investors today.
EARL: Oh yes, for sure. And investors only have the — I’ve been in this industry for 30 years as an active manager — one of the things I can tell you is investors only have the ability to focus on one thing. So it’s not going to be inflation right now. It’s going to be the Strait opening up commercially, at least politically. And the reason why I say that is there’s a significant backlog, and the commercial ships that will go through first are the oil and gas ships, not petrochemicals, not fertilizers, not sulfur, not helium. And that’s why we still see inflation as a concern in the backdrop. But that’s not going to be a story until Q4.
ANDREW: We’re looking now at oil over the past week, down around 14 per cent. Maybe you can have a look at a one-year chart for oil, because, of course, it is still up from late February when the war started. What about Canadian housing? The latest numbers are lacklustre. The national benchmark housing price — which, of course, is a little misleading because markets are so different — but anyway, it has been in steady decline.
EARL: Yes, steady decline is not just housing sales in regard to secondary sales — it’s primary as well. There’s a backlog. New construction is not starting on new condos. There’s a backlog of land. That is the reason why, even though the market is discounting a hike for the Bank of Canada this year — and I can come back to the reason why versus the U.S. — even though they’re discounting a hike, we believe there’s a possibility of an ease driven by housing. And although the Bank of Canada’s mandate is not housing, it’s not growth — it’s actually inflation — that’s why the market is discounting the hike, because of the impact on inflation. That’s their sole mandate. How they look at housing is in regard to future demand and its impact on inflation. So it could very much have an impact on what the central bank does as a secondary effect. We believe it’s an important impact, and that’s why we see the possibility of an ease this year, which is totally different from what the market is discounting — a hike.
ANDREW: Sorry, you’re talking about the Bank of Canada there?
EARL: Bank of Canada, yes.
ANDREW: Right. Is the market anticipating a possible hike by the Bank of Canada?
EARL: Yes, they’re anticipating one hike by the end of this year. And again, the reason why is the Bank of Canada has one sole mandate — inflation — unlike the U.S., which has two mandates: inflation and full employment. So it gives them a lot more degrees of freedom, which is why they could possibly ease this year. But the Bank of Canada’s mandate is inflation. So if inflation is their mandate, they should mechanically hike, to tell you the truth. But they’re a qualitative bank, and they want to ensure consistent growth as well. So we do believe they will ease once by the end of the year.
ANDREW: That’s interesting. Tiff Macklem — wow — that could be a hard one for him to justify, with CUSMA and everything, and the American central bank cutting. But of course, the Bank of Canada has cut so much prior to this.
EARL: Yeah, and they cut a lot more than the U.S., which is why they’ve been on hold for a longer period. But again, housing is a concern for us. We’re seeing it in the numbers. There’s no immediate turnaround anticipated. There are mortgage renewals coming up — the last of the COVID low-rate renewals — which will have an impact on demand. And we think that would be a consideration toward the latter part of this year.
ANDREW: Thank you very much, Earl. I really appreciate it. Earl Davis, head of fixed income and money markets at BMO Global Asset Management.
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This BNN Bloomberg summary and transcript of the April 17, 2026 interview with Earl Davis are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
