The Rate Cuts Are Over — Is a Hike Coming?

 

July 23, 2026

Oil shocks, sticky inflation and a technical recession are pulling the Bank of Canada in opposite directions at once.

For most of the past two years, the only question about the Bank of Canada was how far and how fast it would cut. The overnight rate fell from 5.00% to 2.25% between June 2024 and October 2025, one of the sharpest easing cycles in the Bank's history, and it has held there through six consecutive decisions since. That story is now over. The question on the table for the rest of 2026 isn't whether the Bank cuts again — it's whether the next move is actually a hike.

Two conflicting signals, one Bank

The case for staying put — or even cutting — comes from the growth side of the ledger. Statistics Canada data showed the economy contracted in both the fourth quarter of 2025 and the first quarter of 2026, meeting the informal definition of a technical recession. That was enough to have some economists warning the Bank had no room to raise rates at all. But the picture brightened quickly: April GDP grew 0.5%, the largest monthly expansion since February 2024, and second-quarter growth is now tracking at an annualized 1.5–2%. The recession talk that dominated the spring has largely faded.

The case for a hike comes from oil. The Iran conflict and, more recently, Houthi attacks on tankers in the Red Sea have pushed Brent crude toward the high-$90s a barrel, and that's fed directly into the Consumer Price Index. May's headline inflation reading came in at 3.2%, well above the Bank's 2% target, driven largely by the biggest monthly jump in gas prices on record. Governor Tiff Macklem has been blunt about where the Bank's attention is: it will not let higher energy costs turn into a persistent inflation problem.

What markets are actually pricing in

Bond and swap markets — the closest thing to a real-time poll of what traders expect the Bank to do — currently see September 2 as a near-certain hold, with the odds of a quarter-point hike at that meeting sitting in the low single digits to roughly 10%, depending on the source. The picture shifts further out: by the October 28 decision, markets are pricing something like a one-in-three to two-in-five chance of a hike. Nothing is priced in for a cut at either meeting. A year ago, that would have been unthinkable.

Most bank economists still lean toward the Bank staying on hold through the rest of 2026, betting that April's growth rebound and a labour market that added 88,000 jobs in May give the Bank enough room to wait out the oil shock rather than react to it. But the fact that a hike is now the live alternative to "hold" — rather than a cut — marks a real shift in the conversation.

What It Means for You

Variable-rate mortgage holders: The rate cuts you may have been counting on for 2026 look far less likely now. Prime sits at 4.45%, and variable rates around 3.3% are still the cheaper option today — but the downside protection you'd get from a rate cut this year has largely disappeared.

Renewing or shopping for a mortgage: With a clear direction hard to call, locking in a rate you can live with matters more than trying to time a move that may not come. Fixed rates near 3.9% remove the guesswork if the Bank does end up moving in either direction.

Savers with GICs or high-interest savings accounts: If the Bank does hike later this year, new GIC and HISA rates would likely follow upward — a rare silver lining for savers after two years of falling deposit rates.

What to watch

The next two data points that matter most are June and July CPI readings and how oil prices behave as the Iran conflict and Red Sea shipping attacks evolve. If energy-driven inflation proves temporary and growth holds up, expect the Bank to stay parked at 2.25% well into 2027. If gas prices keep climbing and inflation broadens beyond energy, September 2 and especially October 28 become meetings worth watching closely — for the first time in years, for the opposite reason.

This article reflects market pricing and economic data available as of July 23, 2026, and is for general information only. It is not personalized financial advice.