A few months ago, the idea of the Bank of Canada raising rates again seemed pretty far off. Today, I think we have to take the possibility more seriously. But that doesn’t mean rate hikes are inevitable.
As of September 2026, the Bank of Canada’s policy rate remains at 2.25%. The Bank has acknowledged that upside risks to inflation have increased, while also pointing out that there is still excess capacity in the Canadian economy.
In other words, the signals are mixed.
Rather than trying to predict exactly how many rate hikes we’re going to get — or whether the next move happens in October, December or sometime next year — I think there are three things worth watching.
90-Second Mortgage & Market Update
I’m watching three things: inflation, economic growth and employment.
1. Does inflation start to broaden?
Canada’s headline inflation rate was 3.0% in August, at the top of the Bank of Canada’s 1%–3% target range. But the headline number doesn’t tell the entire story.
Higher gasoline prices have been a major contributor to inflation. More importantly, inflation excluding gasoline increased from 2.2% in July to 2.4% in August. That’s what I’m watching.
Higher energy prices alone probably aren’t enough to force the Bank of Canada to raise rates. The bigger concern would be those price pressures spreading more meaningfully into other goods and services. If that happens, the argument for a rate hike gets stronger.
2. Does the Canadian economy keep surprising to the upside?
The Canadian economy has also performed better than many expected in some areas. Real GDP grew 0.8% in the second quarter of 2026, or 3.3% at an annualized rate, led by exports, household spending and business investment.
One strong quarter doesn’t mean the economy is suddenly booming. The Bank of Canada still says there is excess supply in the economy. But if economic growth continues to outperform expectations, the Bank has less reason to keep rates where they are.
3. Does the labour market strengthen?
This is where the argument for rate hikes gets a little weaker. Canada lost 42,000 jobs in August, the unemployment rate remained at 6.4%, and year-over-year wage growth slowed to 2.0%. That doesn’t look like an overheating labour market.
If employment starts strengthening again while inflation remains persistent and economic growth continues to surprise to the upside, the case for a Bank of Canada hike becomes considerably stronger. If employment weakens further and inflation cools, the argument becomes much harder to make.
My rate-hike dashboard
So rather than focusing on every prediction about the Bank of Canada’s next move, I’m watching:
- Inflation: Is it spreading beyond energy?
- Economic growth: Is the economy consistently performing better than expected?
- Employment: Is the labour market strengthening?
We don’t necessarily need all three indicators flashing red for the Bank to act. But the more of them that start moving in the same direction, the stronger the case for higher rates becomes.
Fixed mortgage rates don’t have to wait for the Bank of Canada
The Bank of Canada doesn’t directly set fixed mortgage rates. Fixed mortgage pricing is heavily influenced by the bond and swap markets, which are constantly reacting to expectations about inflation, economic growth and future interest rates.
That means fixed mortgage rates can move before the Bank of Canada changes its policy rate. We’ve already been seeing that happen.
It’s also why I wouldn’t make a mortgage decision based solely on trying to predict Tiff Macklem’s next announcement. Markets are constantly repricing new information. As I wrote last week, the bond market is giving us a price, not a prediction.
What does this mean for Toronto and GTA homebuyers?
Some buyers are understandably waiting for a bit of a Goldilocks moment:
Lower mortgage rates, lower home prices, lots of inventory and very little competition.
It would be great if all four arrived at exactly the same time. Unfortunately, mortgage rates and the real estate market don’t operate independently.
If borrowing costs fall meaningfully, affordability improves for all the other buyers who have been waiting too. Confidence can improve, competition can return, and some of today’s negotiating leverage can disappear. On the other hand, if rates remain higher, buyers may retain more negotiating power on price.
That’s the trade-off.
The best house on the street probably isn’t going to be deeply discounted at exactly the same moment mortgage rates hit their lowest point.
That doesn’t mean buyers should rush into the market. It means I’d spend less time trying to identify the perfect moment and more time figuring out which combination of purchase price, mortgage payment and negotiating leverage works for you.
My take
I think the risk of a Bank of Canada rate hike is higher today than it was a few months ago. But higher risk isn’t the same thing as a foregone conclusion.
If inflation broadens, economic growth remains stronger than expected and the labour market strengthens, I’ll become much more convinced that a rate hike is coming. If inflation cools and the economy or employment weakens, I’ll become considerably less convinced.
That’s why I’m watching the evidence rather than trying to predict the next five Bank of Canada decisions.
Wondering what changing rates mean for your mortgage?
Whether you’re buying, renewing or comparing fixed and variable, I’m happy to run the numbers with you.
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