The Bank of Canada has kept interest rates unchanged, but investors are increasingly betting that the era of rate cuts is over. With inflation sitting around three percent, crude oil prices elevated by the war in the Middle East and renewed tariffs adding to economic uncertainty, markets are now pricing in the possibility of multiple rate hikes through 2027. What does this mean for Canadian investors?
Why the Bank of Canada Is Watching Tariffs and Inflation
In a move widely expected from Bay Street, the Bank of Canada held its policy interest rate, which has a direct impact on interest rates, at 2.25%. Canada’s central bank has held interest rates at this level since October 2025.
The rate may not stay at 2.25% for long though. Bank of Canada Governor Tiff Macklem indicated that the Canadian economy is facing headwinds from two major risks: high energy prices due to the war in the Middle East and the ratcheting up of the Canadian-U.S. trade war.
Canada–U.S. Tariffs Add to Economic Uncertainty
On September 8, Canada hit back against the U.S. with retaliatory tariffs on $27.0 billion worth of American goods. The tariffs impact hundreds of U.S. products, including dairy, agricultural equipment, paper products, electronics, and household appliances. The duties range from 15% to 50%.
The tariffs hit roughly six percent of the more than $333.0 billion the U.S. exported to Canada in 2025. While the new tariffs probably won’t put much of a dent in America’s economic growth, they will hit some important industries hard.
The tariffs are a dollar-for-dollar response to U.S. duties. The U.S. has hit Canada’s steel, aluminum, lumber, and automotive sectors with tariffs and imposed an additional 50% tariff on $28.0 billion worth of Canadian goods.
War and Crude Oil Prices Could Fuel Inflation
Despite the prolonged trade war and concerns about how it will hurt the Canadian economy and energize inflation, Macklem has highlighted concerns about how high crude oil prices could affect Canada’s economic growth.
The Bank of Canada governor noted that a breakdown in trade negotiations with the U.S. “makes [Canada’s economic] rebound more uncertain.” Canada’s inflation rate currently stands at three percent, well above the Bank of Canada’s target of two percent. The longer the war in Iran and tension in the Strait of Hormuz continue, the greater the chance there is for an energy shock to impact the whole of the Canadian economy.
So, how does war affect oil prices? Disruptions to energy supplies and concerns about shipping through key trade routes can push crude prices higher, adding to inflationary pressures.
The price of Brent crude (the global benchmark) is above $97.00 per barrel, while West Texas Intermediate (the North American benchmark) is above $92.00 per barrel. This is below the peak prices hit in April ($115.00+), but up from where they were back in July (~$70.00) and significantly higher than where they were before the war began in late February (~$60.00).
Investors Expect Interest Rate Hikes in 2026 and 2027
Elevated inflation, the war in the Middle East, and uncertainty around the trade war with the U.S. have led markets to increasingly price in the possibility that the Bank of Canada will raise interest rates later this year and into 2027. Markets are also adjusting their Bank of Canada interest rate forecast, with potential rate hikes now being priced in for later this year and into 2027
Markets expect the Bank of Canada to hold interest rates when it meets next on October 28 but raise them by 25 basis points when it meets in December. Markets are also pricing in additional rate hikes in 2027, potentially bringing the policy rate to 2.5% by the end of 2026 and as high as 3.0% by mid-2027. These are market expectations, however, and the central bank’s actual decisions will depend on how inflation, economic growth, oil prices, and trade conditions evolve.
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