Inflation risks and a recovering economy put rate increases back on the table for Canadian mortgage brokers
Canada's economy is gradually pulling itself out of its early-2026 slump, but the road ahead may carry a sting — Scotiabank Economics is now forecasting that the Bank of Canada will raise interest rates twice before the year is out.
The July 13 Scotiabank Global Forecast, prepared by economists Olivier Gervais, Patrick Perrier, and Farah Omran, projects annual GDP growth of 0.9% for Canada in 2026, little changed from the bank's previous forecast.
That subdued headline figure, however, conceals a meaningful improvement in momentum.
"The economy is beginning to emerge from its recent soft patch," the report said, pointing to April GDP growth of 0.5%, matching the earlier flash estimate, and labour market data that suggest the anticipated recovery may be arriving somewhat sooner than expected.
Scotiabank projects growth accelerating to 2.2% in 2027 as the cumulative effects of past rate cuts work through the housing sector and government outlays catch up with planned spending.
The more consequential signal for Canadian mortgage professionals is the bank's inflation outlook. "Inflation risks remain elevated in our view, which should keep the Bank of Canada cautious and ultimately lead to a gradual normalization of policy rates beginning toward the end of this year," the report said.
Underlying cost pressures — measured through unit labour costs, producer price index data, and the bank's own underlying cost index — "continue to point to elevated inflation risks," the report said, adding that monthly core inflation measures have rebounded after a string of softer readings.
A pressure cooker building in the second half
Derek Holt, senior vice-president and head of capital markets economics at Scotiabank in Toronto, has been the most vocal proponent of this view among Bay Street economists.
Writing after the Bank's fifth consecutive hold on June 10, Holt described the central bank as firmly in monitoring mode, but warned that patience has limits.
"A pressure cooker of developments is likely to build over 2026H2 that could pivot the BoC toward our long-held hike call," Holt wrote.
"Our forecast is for 50bps of hikes in 2026Q4 and another in early 2027 ending at a nominal policy rate of three per cent."
The July report struck a similar note on Canada's inflation trajectory, warning that while headline CPI has been buffeted by volatile energy prices, the underlying picture is less benign.
"While headline inflation remains relatively well behaved, underlying cost pressures continue to run at levels that are inconsistent with a comfortable return to target," the report said.
"These risks warrant a gradual withdrawal of monetary policy stimulus, with the Bank beginning to raise rates twice toward the end of the year.
On oil prices, the report acknowledged that prices fell in June before renewed geopolitical tensions pushed them higher again in July.
"Even after that rebound, prices remain well below the assumptions embedded in our June forecast, creating a modest drag on the near-term outlook," the report said.
"Spot prices are likely to remain volatile in the near term given the geopolitical backdrop."
Scotiabank nonetheless continues to expect oil to settle around US$70 per barrel in 2027, above pre-war levels, reflecting a residual geopolitical risk premium, the report said.
The weaker Canadian dollar featured as an important counterweight. "The weaker Canadian dollar broadly offsets that drag by providing support to exports," the report said, and Canada's exports remain protected under the existing Canada–United States–Mexico Agreement (CUSMA) framework.
Scotiabank assumes the free trade arrangement will ultimately be renewed, the report said.
Scotiabank's forecast tables project the BoC policy rate reaching 2.75% by Q4 2026 and 3.0% by Q1 2027.
The five-year Government of Canada (GoC) bond yield — which underpins fixed mortgage pricing — is projected to rise from roughly 3.01% at the end of Q2 2026 to 3.15% by Q3 and 3.25% by Q4, a trajectory that would apply upward pressure on the five-year fixed rates that most Canadians consider the safer renewal option.
Where the Bay Street consensus sits
Not everyone shares Scotiabank's urgency. TD and BMO expect the policy rate to stay at 2.25% through the end of 2027. CIBC and National Bank see hikes beginning next year, while RBC projects a more gradual tightening cycle that takes the rate to 3.25% by the end of 2027.
Douglas Porter, chief economist at BMO Capital Markets in Toronto, captured the tension between the competing forces.
"If anything, the threat of higher inflation has rekindled chatter of a potential rate hike in 2026," Porter said.
"We still view that as a very long shot indeed, with the economy struggling to grow, core inflation moving closer to the 2% target, and USMCA uncertainty still clouding the outlook."
The Bank of Canada is broadly expected to keep its overnight rate at 2.25% at Wednesday's July 15 policy announcement — a sixth consecutive pause following 50 basis points of cuts in September and October 2025, according to analysis from RBC Economics.https://t.co/QiVjpFb12B
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 13, 2026
What brokers should tell renewal clients now
The Scotiabank forecast arrives before the Bank of Canada's scheduled July 15 rate decision — a meeting most analysts expect will produce another hold.
Still, the prospect of hikes later in the year reinforces what many brokers are already communicating to renewal clients. Roughly 60–70% of Canadian mortgages are expected to renew by the end of 2026, with many borrowers still facing payment increases compared with ultra-low pandemic-era rates.
The report flagged upside risks that could accelerate the Bank's hand: persistent geopolitical tensions, potential additional US fiscal stimulus, and an adverse CUSMA outcome.
"A sustained rise in energy prices would lift headline inflation directly and raise transportation and production costs more broadly," the report said.
"It could also feed into inflation expectations, amplifying and prolonging price pressures, requiring a stronger monetary policy response."
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