The new analysis elaborates on why, and the argument stretches across 11 distinct data points
The Bank of Canada is facing growing pressure to raise interest rates, with financial markets currently pricing in more than two full hikes before the year is out.
Governor Tiff Macklem has not pushed back. On the contrary, he raised the prospect of "consecutive" increases on April 29 if oil prices hold high and inflation spreads beyond energy.
BMO Economics, in a detailed analysis, is pushing back hard. Its conclusion: hiking rates in this environment would be a major policy error.
The bank's chief economist, Douglas Porter, has previously told Canadian Mortgage Professional that a rate hike remains "a very long shot indeed" for an economy already straining under higher borrowing costs, even as geopolitical risks mount.
The new analysis elaborates on why, and the argument stretches across 11 distinct data points.
The core of BMO's case is that the current moment is structurally unlike the 2022 inflation episode that forced the Bank into one of its most aggressive tightening cycles on record. Then, overnight rates had been pinned near zero since the pandemic emergency cuts of April 2020.
Today, the policy rate sits at 2.25%, essentially neutral territory. The starting line for any tightening, in other words, is entirely different.
A very different starting point
In the lead-up to the last hiking cycle, core inflation was already running above 4% and accelerating toward 6%, its fastest pace since 1991.
The three-month annualised pace of core inflation in early 2022 reached 5.5%.
The equivalent measure for the first quarter of this year clocked in at just 1.3%, with the average of the Bank's two preferred core measures at 2.2%.
Real interest rates — the overnight rate minus core inflation — hit a historic low of minus four percentage points in 2022, the analysis points out. They sit at roughly zero today, right in line with the long-run median.
"The key point," the report states, is that "underlying inflation was rollicking when oil prices spiked in 2022, whereas it is becalmed now."
Inflation expectations, too, remain contained. Despite sustained headlines about rising fuel costs linked to the conflict in the Middle East, businesses and consumers are not pricing in a significant acceleration in prices, reducing the risk of the kind of second-round wage and price spiral that made the 2022 episode so difficult to contain.
"We appreciate that no one wants to make the same mistake of underestimating inflation for a second time in four years, but we also don’t want to fight the last war—and current conditions are nothing like 2022, other than headline oil prices," the report added.
Supply chain disruptions, while present, are narrower in scope and nowhere near the scale of the post-pandemic unravelling that swept across virtually every category of goods globally.
Housing, jobs, and a shrinking population
Canada's labour market offers another contrast with the conditions that triggered the last tightening cycle. In the spring of 2022, the jobless rate fell below 5%, job vacancies briefly topped one million and the ratio of vacancies to unemployed workers was historically elevated.
Today, unemployment stands near 6.9%, youth joblessness has risen back above 14%, and total hours worked have slipped 0.5% over the past 12 months.
Statistics Canada's Labour Force Survey for April 2026, released Friday, showed the youth unemployment rate — covering Canadians aged 15 to 24 — climbing to 14.3%, up half a percentage point from March.https://t.co/vzhJxoABwS
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 11, 2026
BMO notes that the Bank of Canada has not raised rates in any of the past 30 years when hours worked were falling on a year-over-year basis — with the sole exception of 1992, when it was defending the Canadian dollar during constitutional turmoil, a decision BMO describes as a significant policy mistake that deepened and prolonged the recession that followed.
Underlying all of this is a demographic reversal without precedent in Canadian history. Population growth, which hit a century high of 3% as recently as 2024, has turned negative — the first such contraction since Confederation in 1867.
BMO views the shift as fundamentally disinflationary, given its direct dampening effect on rents and home prices. It also feeds directly into the softest nominal GDP outlook in years, which is itself inconsistent with the kind of rate increases now being contemplated.
What hiking would mean for borrowers
Tightening into that environment, BMO argues, would smother an already fragile housing market, fan mortgage delinquencies in Ontario and British Columbia, and compound the financial stress for condominium developers already contending with collapsing pre-sale activity.
Five-year bond yields have already climbed 65 basis points since the conflict with Iran began, an implicit tightening that the Bank has had nothing to do with.
Read more: Economists are increasingly confident about the BoC's path for the rest of 2026
The Canada-United States-Mexico Agreement (CUSMA) trade review, meanwhile, adds a further brake on any appetite to hike.
Business confidence is subdued, with the share of firms expecting to have difficulty meeting demand at 40% today, compared with 81% at the start of the last hiking cycle.
GDP growth this year is projected to struggle to reach 1%, against growth of roughly 5% during the 2022 post-pandemic snapback.
With core inflation cooling, growth slowing, housing flat, the labour market softening, and trade uncertainty overhanging the economy, the Bank of Canada's appropriate course is to hold.
"If the Bank does, instead, decide to hike rates, it’s fairly certain that it won’t be long before they are coming back down the mountain on the other side with rate cuts," BMO said.
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