BMO economist Sal Guatieri outlines the conditions that could push the central bank toward a hike or cut
The Bank of Canada held its benchmark rate steady for the fifth consecutive decision last week, and currently looks in no mood to step off the sidelines as economic uncertainty continues.
Most forecasters expect more of the same from the central bank for the foreseeable future – but that doesn’t mean rates are frozen forever. So what would actually need to happen for Bank decisionmakers to consider either a cut or a hike?
Sal Guatieri (pictured top), senior economist and director at Bank of Montreal (BMO) Capital Markets, told Canadian Mortgage Professional the bar for action in either direction is high, but not necessarily unreachable.
The case for a hike
One of the biggest threats to Canada’s economic outlook is no secret: surging oil prices since February as a result of the US-Israel war on Iran, putting upward pressure on inflation and squeezing Canadians at the pumps.
While positive news emerged late on Sunday as US president Donald Trump suggested an end to the war could be imminent, there’s still no sign of a deal – and if the war rumbles on and continues to spike the price of oil, Guatieri said it could spur the Bank into hiking rates.
“If higher energy costs do spread to other prices and we see a generalized increase in inflation, they may need to take action and raise rates,” he said.
Bond markets currently see an 8% chance of a 25-basis-point hike at the Bank’s July 15 meeting, rising to 32% by September 2, according to nesto.ca’s rate forecast tracker. Scotiabank is the most hawkish of Canada’s major banks, forecasting 50 basis points’ worth of hikes in the fourth quarter of the year.
The case for a cut
While inflation outlook remains troubling for the Bank, governor Tiff Macklem was frank about the current weakness of the Canadian economy in his remarks to the media last week – even if he stopped short of describing it as a recession.
While the labour market unexpectedly added nearly 90,000 jobs at last reading, the economy has sagged under the weight of US tariffs and broader uncertainty since the beginning of 2025 – and there seems little chance of it roaring back between now and the end of the year.
Further weakness in gross domestic product (GDP) could prove a key variable in the Bank of Canada’s approach to the rest of the year, according to Guatieri.
“If we see further shocks to Canada’s economy… if we see further evidence of weakness in the economy and no clear signs of a pickup in GDP growth in Q2, that could spur the Bank of Canada into action as far as providing more support to the economy by cutting interest rates,” he said.
Like Macklem, many major economists have questioned whether the country is actually in a recession despite recording consecutive GDP declines on a quarter-over-quarter basis.
The bottom line
Brokers and borrowers would undoubtedly welcome rate cuts because they could provide the impetus for the housing market to gather pace with a subdued first half of the year nearly over.
Affordability has remained a huge challenge in the housing sector, with Ratehub reporting that most Canadian markets saw buying prospects worsen in April thanks in part to climbing interest rates.
Still, a cut remains a distant prospect – and by far the most likely scenario is a prolonged hold by the Bank as the Iran conflict and CUSMA (Canada-United States Mexico Agreement) renegotiations continue.
Guatieri said it would take a significant deterioration in the economic outlook for the Bank to step off the sidelines and cut rates, while a hike is also unlikely.
“Unless something goes wrong further in the economy or with respect to tariffs… we’re unlikely to see the Bank of Canada cut interest rates,” he said.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
