A sustained rise in

oil prices

would lift Canada’s economic growth and inflation outlook,

Bank of Nova Scotia says.

The war in Iran has already pushed petroleum prices higher, which may increase what Canada — a major crude-producing country — earns from exports relative to what it spends on imports.

A persistent US$10-a-barrel boost in the price of

West Texas Intermediate

would mean the level of Canada’s real

gross domestic product

would be 0.5 per cent higher by the end of 2027, according to Olivier Gervais, director of modeling and forecasting at Scotiabank.

“Higher oil prices represent a sizeable nominal income transfer into Canada. Energy sector profits and investment rise, supporting employment and eventually household spending,” Gervais said in a report Monday.

The lift would be partly offset by weaker household purchasing power as gasoline prices rise. While core inflation would be “relatively contained,” the consumer price index would be 0.2 percentage points higher by the end of 2027 and the Canadian dollar would appreciate about three per cent, “dampening imported inflation but weighing on non-energy exports.”

Overall, the model implies the

Bank of Canada

’s policy rate would be 30 basis points higher by the end of next year, said Gervais, who also worked for the central bank for 17 years.

The analysis underscores the challenge for policymakers confronting overlapping supply shocks. In a speech Monday, Deputy Governor Sharon Kozicki said the central bank’s decision-making becomes more complex during supply shocks, which can simultaneously pressure growth and prices.

The economy has already been strained by U.S. tariffs that have weighed on exports and business investment. Despite firmer domestic demand in the fourth quarter, output contracted at a 0.6 per cent annualized pace as inventories were drawn down.

The bank projects inflation to stay close to the two per cent target over the next couple of years and has signaled comfort with holding the overnight rate at 2.25 per cent as the economy adjusts to structural changes from the trade dispute.

Traders in overnight swaps are betting rates remain at that level through 2026, though pricing for hikes has edged higher since the Middle East conflict escalated. Canada’s bonds have sold off across the curve.

“A move higher in oil prices lowers the risk of the Bank of Canada cutting rates this year,” Andrew Kelvin, head of Canadian and global rate strategy at Toronto-Domionion Bank, said by email.

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Oil surged the most in four years as the first impacts of the war began to be felt, with a near-halt to traffic through the Strait of Hormuz and disruption at a big refinery in Saudi Arabia underscoring the threat to supplies. West Texas Intermediate was above US$70 a barrel in early afternoon trading Monday.

Canadian crude is expected to outperform US benchmarks as refiners seek alternatives to sour grades from the Middle East, including Iraq and Saudi Arabia.

With assistance from Robert Tuttle

Bloomberg.com