Bank of Canada Holds at 2.25% and Warns Consecutive Rate Hikes Possible If Oil Prices Keep Pushing Inflation Higher

The Bank of Canada kept its overnight rate target at 2.25% on April 29, 2026 — the level it has held since October. The Bank Rate sits at 2.5% and the deposit rate at 2.20%. On its own, a hold is not news. Seven consecutive holds would barely register.

What changed is the language.

Governor Tiff Macklem used the accompanying Monetary Policy Report to lay out something Canadian borrowers have not heard since the last tightening cycle: a scenario in which the Bank raises rates multiple times in a row. The trigger is oil prices. Driven sharply higher by the war in the Middle East, crude has pushed headline inflation to 2.4% in March and, by the Bank's own projection, will send it to roughly 3% in April. The Bank is "looking through" the near-term spike — but only conditionally.

"If oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing generalized inflation increases," Macklem said. "If this starts to happen, monetary policy will have more work to do — there may be a need for consecutive increases in the policy rate."

In the same breath, he offered the opposite scenario. If the United States imposes significant new trade restrictions on Canada, the Bank may need to cut rates further to support growth. Two directions. One policy rate. No certainty about which path Canada follows.

The transmission is straightforward, even if the outcome is not. War-related disruptions have pushed global oil prices well above the Bank's prior assumptions, increasing gasoline costs directly and raising transportation and input costs across the supply chain. For an oil-exporting economy like Canada, there is an offsetting revenue benefit — higher crude prices lift export income and government royalties. But consumers still feel it at the pump and in their heating bills.

The Bank's baseline assumes oil drifts back toward US$75 per barrel by mid-2027. If that holds, inflation peaks at about 3% now and glides back to the 2% target by early next year. Growth runs at a modest 1.2% in 2026, rising to 1.6% in 2027 and 1.7% in 2028 as excess supply is gradually absorbed.

That is the comfortable path. The uncomfortable one is that oil stays elevated — or rises further — and energy costs begin feeding into prices for food, services, and goods more broadly. If inflation expectations start drifting upward, the Bank's tolerance evaporates. Consecutive hikes become the tool of last resort to prevent a repeat of the 2022 inflation overshoot.

The April MPR's risk section describes inflation risks as "unusually high." Two external forces pull the economy in opposite directions, and the Bank cannot resolve the tension in advance — it can only prepare for both.

Path A — Oil stays high, inflation broadens: If energy-driven price increases spill into other goods and services, and if near-term inflation expectations start to rise, the Bank moves to consecutive hikes to re-anchor expectations. This path hurts variable-rate borrowers immediately and raises the renewal rate for anyone coming off a fixed term in the next 12–18 months.

Path B — Trade restrictions tighten, growth weakens: If the United States escalates tariffs or imposes new restrictions on Canadian exports — particularly ahead of the upcoming CUSMA review — the resulting demand shock could push the Bank toward further rate cuts. This path would ease borrowing costs but signal deteriorating economic conditions, with potential knock-on effects on employment and property values.

CIBC economist Avery Shenfeld captured the impasse: "That sounds like a central bank that thinks it could stand pat." Both risks are credible. Neither dominates. For now, the Bank watches and waits.

The numbers behind the uncertainty are large. OSFI's 2026–2027 Annual Risk Outlook reports that 3.1 million mortgages — 52% of all Canadian mortgages — are scheduled to renew by the end of 2027. Of those, about 1.3 million are fixed- or variable-rate-with-fixed-payment loans originated during the low-rate period of 2021–2022, expected to face material payment increases at renewal.

The Bank of Canada's own research puts the scale in perspective. A July 2025 staff note estimated that roughly 60% of renewing borrowers in 2025–2026 would see higher payments — on average about 10% higher in 2025 and 6% higher in 2026. Five-year fixed borrowers renewing in 2026 could face increases of about 20%, while variable-rate, variable-payment holders might actually see modest declines of 5%–7% as rates settled from prior peaks.

Those estimates, however, were built on market-implied rate paths that assumed a stable or gently declining policy rate. Macklem's consecutive-hike scenario changes that calculus.

The challenge for homeowners is that locking into a fixed rate protects against Path A but sacrifices the potential benefit of Path B. Staying variable captures Path B's upside but leaves borrowers exposed to Path A. Neither choice dominates when the central bank itself describes both paths as plausible.

This is not the first time Canadian homeowners have faced renewal uncertainty, but the structural conditions are unusual. CMHC's Fall 2025 mortgage industry report documented the scale: more than 750,000 mortgages renewed in the second half of 2025, with about 1.15 million coming due in 2026 and 940,000 in 2027. The average five-year fixed rate on uninsured mortgages rose from 2.36% in July 2020 to 3.95% in July 2025 — a 67% increase.

A separate February 2026 CMHC analysis noted that more than 1.5 million households have already renewed at higher rates, with another million expected in the coming year. Mortgage arrears have ticked up by about 7 basis points between Q3 2023 and Q3 2025 but remain historically low, partly because borrowers are extending amortizations to keep payments manageable.

That resilience is encouraging. But it was built during a period when rate expectations were directionally clear — rates were coming down. Macklem's April statement introduced a credible path in which they go back up. For borrowers who extended amortizations as a coping strategy, another round of increases would narrow the remaining room to manoeuvre.

Meanwhile, variable-rate products have gained significant market share. CMHC's June 2025 mortgage market summary found that variable-rate mortgages accounted for 41% of new loans in February 2025, with short-term fixed products making up another 32%. A larger share of borrowers are now directly exposed to near-term policy-rate moves than in the traditional five-year-fixed-dominant environment.

The Bank's June 10 decision will be the next checkpoint. No rate change is expected — money markets are pricing the first potential move (a 25-basis-point hike) for October at the earliest. But language matters more than action right now. If Macklem softens or removes the consecutive-hike warning, the baseline is holding. If he sharpens it, the oil-inflation channel is gaining traction.

Three indicators will tell the story before the Bank acts. Oil prices relative to the US$75 benchmark: every sustained $10 above that level increases the probability that the Bank's "looking through" stance gives way to action. The April and May CPI prints: if headline inflation stays above 3% and core measures start drifting upward, the tolerance window shrinks. And U.S. trade policy signals: any escalation ahead of the CUSMA review would shift the balance toward the cut scenario, regardless of what oil is doing.

For Canadian homeowners approaching renewal, the practical takeaway is that certainty is not available right now — from the Bank, from economists, or from rate forecasters. The TD Bank survey published earlier this month found that two-thirds of homeowners are already anxious about renewal, with 56% planning to cut spending. That anxiety reflects a rational reading of the environment. The Bank of Canada just confirmed it.

What homeowners can do is narrow the range of outcomes they need to plan for. Know your renewal date. Understand your current rate versus today's posted rates. Model the payment difference under a 50-basis-point increase and a 50-basis-point decrease. The OSFI stress test exists precisely for environments like this one — it ensures you can handle payments at a rate higher than today's. If your budget works at the stress-test rate, the two-way uncertainty is manageable. If it does not, that conversation with your lender should happen before the Bank's June decision, not after.