Wednesday 21 October 2026

The next move in Canadian interest rates is up, and the risk is that the first increase arrives before the early-2027 date the Parliamentary Budget Officer now assumes. Borrowers should plan for rates that are flat to higher over the next 18 months, not lower.

Why we think so. The PBO’s Economic and Fiscal Outlook is the closest thing Canada has to an independent base case, and its message is sober. Growth is now projected at 0.9% for 2026 and 1.5% for 2027, down from 1.1% and 1.6% in June, because the breakdown of trade talks lifted the effective U.S. tariff on Canadian goods from 5.3% to 7.7%. Unemployment is expected to reach 6.7% by year end. On its own, that combination would point to lower rates. Inflation is why it does not: the PBO expects it to average 2.8% in 2026 on higher energy prices, and now assumes the Bank of Canada starts raising its policy rate in early 2027, reaching 2.75% by mid-year, two quarters earlier than it assumed in June. We think the risk sits earlier still. Energy is keeping headline CPI near 3%, and the Bank’s own surveys show expectations drifting up. A central bank worried about expectations does not usually wait for a forecaster’s timetable.

What the market is pricing. The PBO’s path, a hold through 2026 and hikes in 2027, is a sensible central case and far closer to our view than the falling-rate path many households still assume. Where we differ is on timing. The bond market moved sharply this week as traders began pricing a real chance of a hike on 28 October. Our central case for that meeting remains a hold with firm language, but the direction is shared: nobody in this picture, at the PBO or in the market, is pencilling in cuts.

What it means. For borrowers waiting for cheaper money before renewing or refinancing, the PBO is saying it is not on its way. Variable-rate borrowers and those with lines of credit should test their budgets against a flat-to-rising path. For savers, the same outlook supports GIC and savings rates. For business owners, the tariff assumption matters as much as the growth figure: the outlook does not assume a deal, it assumes the U.S. measures in place on 1 October stay. The fiscal numbers carry a quieter message. The deficit is projected at $63.3 billion in 2026-27, peaking at $70.2 billion and still $67.8 billion in 2030-31, with federal debt rising from 40.8% to 42.6% of GDP, largely because $52.6 billion of new measures, $36 billion of it the Productivity Mega Deduction, outweighs stronger revenues. Deficits of that size with growth this slow leave little room for new relief, which argues for keeping tax decisions flexible.

What would change our mind. Oil falling durably below US$90 and core inflation settling under 2% by year end. That would push any hike well into 2027, or remove it altogether.

What to watch. The Bank of Canada decision on 28 October is the next test of the rate path. The U.S. Federal Reserve is in its blackout period until 29 October. Today’s U.S. EIA weekly crude inventory report and the U.S. Treasury 20-year bond auction feed into the energy and bond-yield picture behind both.

Canada’s 20-year housing boom is a record, not a forecast. With population growth slowing and supply catching up, we expect real house prices to be roughly flat nationally for several years, with wide differences between regions.

Why we think so. CMHC’s research is clear about cause. After inflation, Canadian house prices rose 101% between 2005 and 2025, faster than in any peer: Australia managed 79%, New Zealand 77%, Sweden 64% and the United States 30%. The explanation is not one event but demand outrunning supply for a long time. Canada’s population grew 29% over the period against 15% in the U.S., while the pace of homebuilding stayed roughly stable, leaving about 426 dwellings per 1,000 residents, below the OECD average of 468. The turn is recent. In 2023 and 2024 the country added nearly five new residents for every home completed. In 2025, with population growth slowing, that ratio fell to about 1.5, which CMHC treats as close to balance. The engine of the past two decades was the gap between new people and new homes, and when that gap closes, the main source of real price growth goes with it. Prices need not fall for this to matter; they only need to stop outpacing inflation.

The bigger picture. Over long periods, house prices are set by the balance between the number of households needing homes and the number of homes available, with interest rates deciding how much buyers can borrow. Canada had strong population growth working in its favour for most of this period. Today population growth is slowing, and the rate outlook elsewhere in this brief points to borrowing costs that are flat to higher rather than lower. As Aled ab Iorwerth put it, the issue is that demand grew faster than supply for longer than in comparable countries. A national average also hides a great deal: local supply, local jobs and local migration will produce very different results from city to city.

What it means. For most households the home is the largest asset, and the past 20 years taught people to expect it to keep compounding. A retirement or downsizing plan that relies on the house doing what it did since 2005 relies on conditions that have changed. A prudent test is to run the long-term plan with the home growing no faster than inflation and see whether the retirement and downsizing numbers still work. Treat the home as shelter and a store of value rather than an engine of growth. Where much of a family’s net worth sits in one property, the data argue for building other savings, such as RRSP and TFSA assets, alongside it. For estate planning, a more modest assumption about the home’s future value can change what heirs can expect and how a downsizing should be timed.

What would change our mind. Population growth returning above 2% a year, or mortgage rates falling by a full point. Either would reopen the gap between demand and supply and restart real price growth.

What to watch. Today’s Statistics Canada release on investment in building construction for August, for the supply side, and the federal immigration levels plan due in November, the single biggest input into future housing demand.

With speculative funds fully long and Gulf exports recovering, the next large move in oil is more likely down than up, but only on a ceasefire that holds. Until then we expect the US$95 to US$110 band to persist, keeping Canadian headline inflation above 3% into year end.

Why we think so. Tuesday showed how fragile the price is. The expiring November WTI contract traded in a range of roughly US$9, touching US$110.48 before closing at US$101.79, after an unconfirmed report that Washington and Tehran were close to an agreement; Bloomberg later reported the claims were inaccurate. Brent for December settled 0.7% lower at US$108.79 and December WTI at US$97.82. Two facts point to downside risk. The first is positioning: Kpler says trend-following funds are at their maximum long position in both benchmarks, and open interest is the lowest since March 2025. When those who want to buy have already bought, few buyers remain to push prices higher, and credible good news can set off rapid selling. The second is supply: Gulf crude exports have recovered to about 80% of their pre-war level, according to U.S. Energy Secretary Chris Wright, though refined products are still constrained. The risks remain real, with Iran stepping up attacks on tankers in the Strait of Hormuz and a supertanker reported hit by a mine, which is why we expect the band to hold until the conflict is settled.

The bigger picture. Crude is up about 80% this year, and much of the price now reflects fear of what could happen rather than barrels actually lost. A premium of that kind can disappear quickly when the fear eases. Politics adds another layer: as Dan Pickering of Pickering Energy Partners put it, this close to the election the optics matter as much as the fundamentals, with U.S. midterms on 3 November.

What it means. Energy is what stands between headline inflation near 3% and core measures near 2%, so every swing in crude is a swing in the odds of a Bank of Canada hike. For households, the difference shows up at the pump and on the heating bill, and a winter budget built at today’s prices is the safer one. For business owners with fuel costs, check whether supplier surcharges are tied to a benchmark and whether the budget can absorb a 10% move in either direction over a month. For investors, the energy-heavy TSX rises and falls with the same headlines, so a Canadian equity holding carries more oil exposure than many people realize, and stretched positioning makes that exposure more vulnerable to a sharp fall than to another leg up.

What would change our mind. A confirmed closure of the Strait of Hormuz or a sustained loss of Gulf exports. That would take Brent above US$120 and make the Bank of Canada’s October decision much harder.

What to watch. Today’s U.S. EIA weekly crude inventory report, the Bank of Canada decision on 28 October, where oil is the swing factor, and the U.S. midterms on 3 November.