The prospect of another oil‑driven inflation flareup has revived chatter that the Bank of Canada could be forced back into tightening in 2026.
However, BMO Economics’ Douglas Porter argued that, even in a darker global backdrop, a rate hike this year remains “a very long shot indeed” for a Canadian economy already straining under higher borrowing costs.
Canada’s policy rate sat at 2.25% heading into the spring, with core inflation edging closer to the 2% target even as geopolitical risks and US trade tensions clouded the outlook.
External analysts also highlighted that much of the recent price pressure stemmed from tariffs and energy rather than domestic overheating, and that growth has been modest despite headline resilience.
Oil shock revives stagflation fears
“To think that just one week ago, the biggest concern for markets was something as humdrum as whether AI was going to take all our jobs and ravage the economy in the years ahead. Those were the good old days,” Porter wrote in a recent note titled Life During Wartime.
“The conflict with Iran has abruptly changed the economic outlook, with crude oil prices vaulting more than 35% in the past week alone to above $90/barrel for WTI… The spike has rekindled inflation risks, reduced the odds of central bank rate cuts globally, and is now threatening the global growth outlook.”
“As much as the term ‘stagflation’ has been wildly over‑used in recent years, a true oil price shock would indeed increase the risks of stagflationary forces – higher inflation, weaker growth; not a market‑friendly combination,” he said.
Why BMO still sees a hike as “a very long shot”
Unlike the US Federal Reserve, where markets remain divided over the scale and timing of future cuts, there has been “little debate over the amount of potential rate cuts by the Bank of Canada – even prior to the spike in oil, the consensus was firmly that there would be no move on rates this year,” Porter said.
“If anything, the threat of higher inflation has rekindled chatter of a potential rate hike in 2026,” he added.
“We still view that as a very long shot indeed, with the economy struggling to grow, core inflation moving closer to the 2% target, and USMCA uncertainty still clouding the outlook.”
Trade talks under the Canada–US–Mexico Agreement (CUSMA) review framework has finally restarted after a four‑month pause, with minister Dominic LeBlanc travelling to Washington as Ottawa warned that annual reviews and deliberate uncertainty are now on the table.
“One optimistic view is that the Iran conflict makes a deal more likely… But given the choppy U.S.-Canada relations over the past 14 months, there are clearly many less favourable possibilities as well,” Porter said.
“We continue to err on the side of caution on the outlook for USMCA (i.e., prolonged uncertainty) in our Canadian economic forecasts.”
Mortgage market faces renewal grind, not another shock
For mortgage professionals, the key question is how long rates stay restrictive, not whether the BoC delivers a surprise hike next year.
Roughly 60–70% of Canadian mortgages are expected to renew by the end of 2026, with many borrowers still facing payment increases compared with ultra‑low pandemic‑era rates.
Brokers already cast 2026 as a “reset year”, shifting from rate predictions to managing affordability pressure, renewal shock and a growing reliance on alternative and private solutions as more files move out of the narrow prime box.
The “great renewal” shows more than two million mortgages set to renew between 2024 and 2026, a 57.7% year‑over‑year surge in Q1 2025 originations driven by renewals and refinances, and growing payment stress in higher‑priced provinces such as Ontario and British Columbia.
CMP
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