If you’ve seen headlines suggesting the Bank of Canada could raise interest rates and thought, How does that make sense when the economy already feels slow? you’re not the only one.
Growth has cooled. Unemployment is higher than it was at its post-pandemic lows. Many households are already feeling the pressure of higher living costs and borrowing costs. So on the surface, the idea of another rate hike can feel disconnected from what people are experiencing day to day.
But this is where things get a little tricky: the way the economy feels and the way inflation behaves do not always move together.
That is why some economists are still talking about the possibility of a rate hike, even in a softer economy.
A quick look at where rates actually are
The Bank of Canada sets the overnight rate, which helps shape borrowing costs across the country. When that rate changes, it can influence variable-rate mortgages, lines of credit, business loans, and, over time, even fixed mortgage rates.
As of March 2026, the policy rate sits at 2.25%, with the next scheduled rate announcement set for March 18, 2026.
That number comes after a sharp swing over the past few years. During the pandemic, the Bank cut rates to 0.25% to support the economy. Then, when inflation surged in 2022 and 2023, it raised rates aggressively, eventually reaching 5%. Later, as inflation eased and growth slowed, the Bank began cutting again, bringing the rate down to today’s level.
In other words, Canada went from near-zero rates to 5%, and then back down to 2.25%. Now the question is whether rates stay here or begin moving higher again.
So why is a hike even on the table?
At first glance, the case for a rate hike seems weak. Growth is modest, the job market is no longer as hot as it was, and both consumers and businesses are showing signs of caution.
So why is the idea still on the table?
Because rate decisions are not based only on growth. They are also based on inflation risk, and right now, some economists see inflation risks that could become more serious later this year.
Trade pressure is part of the story
One of the biggest concerns is trade tension, especially between Canada and the United States.
Tariffs make imported goods and production inputs more expensive. When businesses pay more for materials, transportation, or inventory, some of those costs often get passed on to consumers. That means prices can rise even when the broader economy is not especially strong.
This is one reason economists are paying close attention to the second half of 2026. If tariff pressures build, inflation could pick up again, and the Bank of Canada may feel pressure to respond.
The economy has not cracked the way many expected
Even though growth has slowed, some recent data has come in stronger than expected. A few employment reports have surprised to the upside, and GDP has performed better than some earlier forecasts suggested.
That matters because when the economy proves more resilient than expected, markets start to wonder whether current rates are still low enough to keep inflation under control.
And that shift in expectations can affect the market before the Bank of Canada makes any move at all. Bond yields can rise. Mortgage pricing can adjust. Confidence can shift.
Inflation may be cooler, but it is not fully settled
Headline inflation has moved closer to the Bank’s 2% target, which is good news.
But core inflation, which strips out some of the more volatile categories like energy, has been more stubborn. That is important because central banks tend to focus closely on these underlying measures when deciding whether inflation is truly under control.
From the Bank’s perspective, the issue is not just where inflation is today. It is whether inflation could start rising again if trade costs increase or consumer demand stays firmer than expected.
Markets are already reacting to the possibility
Markets do not wait for official announcements to react. Investors are constantly trying to price in what central banks might do next.
Right now, bond markets are reflecting at least some possibility of modest rate increases later in 2026. That does not mean a hike is coming for sure. It simply means the risk is real enough that markets are preparing for it.
That alone can influence borrowing costs, especially in the mortgage market.
The July CUSMA review could shift everything
One of the biggest unknowns this year is the scheduled July 2026 review of CUSMA, the Canada-United States-Mexico Agreement.
Why does that matter?
Because the outcome could affect both inflation and growth.
If trade tensions increase and more tariffs are introduced, prices could move higher. But if trade weakens more broadly, economic growth could slow further and recession risks could grow.
Those are two very different scenarios, and they would likely call for very different responses from the Bank of Canada. That is part of why there is still so much uncertainty around the second half of the year.
Why forecasts are still all over the map
There is no single consensus right now.
Some institutions expect the Bank to hold rates steady for much of 2026. Others see the possibility of modest increases later in the year. A few believe the next move, if it comes, could be upward, but not necessarily the start of another aggressive tightening cycle.
What most economists seem to agree on is this: a change at the March 18 announcement is unlikely. The bigger debate is about what happens later in 2026, especially if inflation pressures build again.
What this means if you have a mortgage or are planning a move
For households, the takeaway is not panic. It is preparation.
If you have a variable-rate mortgage, a rate increase would likely affect you quickly. Even if a hike is not the most likely outcome today, it is worth stress-testing your budget so you know what a small increase would mean for your monthly payments.
If you have a fixed-rate mortgage renewing in 2026 or 2027, you are still dealing with a higher-rate environment than the one many borrowers locked into a few years ago. Even if the Bank holds steady, that does not automatically mean mortgage rates will fall meaningfully in the near term.
For buyers and sellers, the message is similar. The market may continue to feel relatively stable in the short term, but it would be risky to assume that more rate cuts are guaranteed. This spring is more likely to be shaped by caution than urgency.
What is worth paying attention to now
The conversation around a possible rate hike is not really about strong economic growth. It is about inflation risk.
More specifically, it is about the possibility that inflation could re-accelerate because of trade tensions, tariffs, and stubborn underlying price pressures, even while the broader economy feels slow.
That is the balancing act facing the Bank of Canada right now: growth is softer, but inflation risks have not fully disappeared.
For now, stability still appears to be the most likely near-term path. But the range of possible outcomes is wider than it was a year ago, and that is why the rate conversation has become more complicated. The next big signal comes on March 18.
