Tiff Macklem warns Canadians: Interest rates may need to rise if Iran war-driven inflation persists

Statistics Canada attributes much of that swing to fuel costs. Gasoline prices were up 33.2% compared with a year earlier in May before slowing to a 20.5% annual increase the next month. If you remove gasoline from the equation, inflation remained close to the Bank’s 2% target throughout both months.

In its July Monetary Policy Report, the Bank identified the conflict in the Middle East and Canada’s trade relationship with the United States as the two biggest risks to inflation. While it still expects inflation to ease to roughly 2.5% during the second half of 2026 and return to its 2% target by early 2027, that outlook assumes oil prices don’t remain elevated for an extended period.

What another hike could mean for your mortgage

Variable-rate mortgages, HELOCs and other loans tied to the prime rate generally move in lockstep with the Bank of Canada’s overnight rate. When the Bank raises its benchmark rate, lenders typically increase their prime rates by the same amount, raising borrowing costs almost immediately.

For example, a 0.25 percentage-point increase on a $400,000 variable-rate mortgage amortized over 25 years would raise monthly payments by roughly $55. On a $600,000 mortgage, the same increase would add about $81 per month. These examples are for illustration only and aren’t a prediction of what any lender will charge.

Fixed-rate mortgages work differently. Their pricing is driven primarily by Government of Canada bond yields rather than the Bank’s overnight rate. Because bond markets have already been pricing in trade uncertainty and geopolitical risks, Canadians renewing a fixed-rate mortgage this year may be feeling the effects.

Skip the bank-hopping. Shop rates and terms using online mortgage tools. For instance, Homewise lets you compare rates from 30+ lenders with one simple application — getting you the best rate in minutes. Get personalized mortgage options from Homewise.

What to do now

Interest rate increases don’t affect all Canadians equally. However, if you have a variable-rate mortgage, a HELOC or a mortgage renewal coming up within the next year, now is a good time to understand how another quarter-point increase could affect your finances. If you’re a retiree living on a fixed income, a newcomer to Canada or a first-time homebuyer, you may also feel the impact through higher borrowing costs or rising prices for essentials such as gasoline and groceries.

A few practical steps can help you prepare:

• Check whether your mortgage or HELOC is tied to the prime rate. If it is, ask your lender how much a 0.25 percentage-point increase would add to your monthly payment.
• If you’re renewing your mortgage within the next 12 months, compare today’s fixed- and variable-rate options instead of waiting until your renewal date.
• Build a little extra room into your monthly budget for gasoline and grocery costs, which remain the biggest drivers of inflation.
• Watch for the Bank of Canada’s next interest rate announcement on September 2.

The Bank’s next decision is still weeks away, and Macklem was careful to frame another rate hike as a possibility rather than a prediction. But if higher energy prices begin pushing up the cost of everyday goods and services, the Bank has made it clear it’s prepared to act.