Bank of Canada Holds at 2.25%, But Rate Hikes Are Back on the Table for 2026

The Bank of Canada held its policy rate at 2.25% on Wednesday — its third consecutive hold since October 2025 — but the tone from Governor Tiff Macklem was notably less reassuring than in previous decisions. With the Iran war pushing energy prices higher and the domestic labour market shedding jobs, the Bank is now openly signalling it could move rates in either direction. Markets are pricing a 73.2% probability of a hike by December 2026. For small business owners carrying variable-rate debt or planning capital investments, the era of falling borrowing costs may be over.

Why the Hold Doesn't Mean Stability

A rate hold sounds like good news — and in the short term, it is. But the language coming out of Wednesday's announcement represents a meaningful shift. Rather than signalling that the current rate 'remains appropriate,' Macklem emphasized the Bank is 'prepared to respond as needed,' framing the decision as a pause rather than a plateau. 'The consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate,' Macklem told reporters — a statement that, stripped of central bank caution, means: we genuinely don't know what comes next.

The Bank cited weaker economic activity, elevated uncertainty, and rising inflation risks driven by higher energy prices as the primary forces shaping its thinking. Early 2026 data suggests the economy is expanding again, but at a slower pace than the Bank projected in January. That combination — tepid growth plus an energy-driven inflation threat — is the worst possible environment for rate predictability.

The Iran War Is Now a Domestic Financial Variable

The Middle East conflict has moved from geopolitical backdrop to active factor in Canadian monetary policy. Rising oil and natural gas prices — a direct consequence of the Iran war — are the Bank's stated short-term inflation concern. Macklem was explicit: 'We're supporting economic activity while ensuring that a jump in energy prices doesn't turn into persistent inflation.' The key word is 'persistent.' As long as energy shocks are treated as temporary, the Bank can justify holding. But Macklem also signalled that if energy price increases spread beyond their immediate sectors and become embedded in broader prices, the Bank can and will raise rates. Scotiabank projects two hikes by year-end if current conditions persist.

A Soft Labour Market Complicates the Picture

On the other side of the ledger, Canada's labour market is providing some downward pressure on inflation expectations. The Bank noted that job gains from late 2025 have been largely reversed, with Employment losses totalling 84,000 in February alone. A weaker labour market typically reduces consumer spending pressure and gives the Bank room to hold or cut rather than hike. This is the offsetting force keeping a hike from being a certainty — and it's why Macklem explicitly kept both options open: if energy prices fall and the economy weakens further, rate cuts remain possible.

What the Market Is Telling You

The bond market is not waiting for certainty. A 73.2% probability of a December 2026 hike, as currently priced, is high enough to act on. For context, that's not a tail risk — it's the market's base-case scenario for year-end. Most economic forecasters still expect the Bank to remain on hold through most of 2026, but the Scotiabank projection of two hikes underscores that the range of outcomes is wide. Business owners should not plan their finances around the hold continuing indefinitely.

What This Means for Your Business

If your business carries variable-rate debt — a line of credit, a floating-rate term loan, or a commercial mortgage tied to prime — now is the time to stress-test your cash flow against a 2.50–2.75% rate scenario. A 25 to 50 basis point hike may sound modest, but on a $500,000 line of credit, that's an additional $1,250 to $2,500 in annual interest costs at minimum. Run those numbers before you need to. If you were planning to refinance or lock in a fixed rate, the window to do so at current levels is narrowing. Talk to your bank or a commercial broker about fixed-rate options while the hold is still in place.

On the cost side, watch your energy-linked expenses closely. If the Iran conflict sustains elevated oil and gas prices into summer, businesses with significant fuel, shipping, or heating costs will feel that pressure regardless of what the Bank does with rates. Build a conservative energy cost assumption into your Q3 and Q4 budgeting now. And if you're considering a major capital investment that depends on borrowing, the calculation has changed: the all-clear on cheap money that defined 2024 and early 2025 is no longer operative. Factor in a higher cost of capital before signing anything.