The Bank of Canada’s Surprisingly Hawkish Turn
September 8, 2026
The US Consumer Price Index (CPI) increased by 3.4% (annualized) in August and by 0.4% month-over-month. Both results were in line with the consensus forecast. But the US core CPI, which strips out the most volatile inputs such as food and energy, came in hotter than expected – and that may well be the final data point needed to lock in a 0.25% policy-rate hike by the US Federal Reserve when it meets this week.
New US Federal Reserve Chair Kevin Warsh had advocated for a potential rate cut in the lead-up to his appointment by US President Trump, who has been demanding a lower Fed policy rate since his re-election.
But two weeks ago, in his speech at Jackson Hole, Warsh turned hawkish. He warned that inflation needed to be moving back to the Fed’s 2% target “clearly and at sufficient speed. Otherwise, we have work to do”. In the same speech, he assessed that the recent US inflation data “do not tell me that underlying trends have meaningfully improved”. Last week’s US inflation data aren’t likely to alter his assessment.
Warsh’s hawkish turn was overdue, but even if he still wanted to hold the Fed’s policy rate steady, it appears increasingly unlikely that the other eleven voting members on its rate-setting committee would follow his lead. And for good reason.
The US fiscal deficit as a percentage of GDP is running at about 6% right now, well-above its average of 3.8% over the past fifty years. The US is also engaged in a costly war with Iran, which is causing a spike in energy prices (and other commodities) and is further taxing public coffers.
At the same time, President Trump’s affinity for tariffs is putting additional upward pressure on a broad range of import prices. A recent study by the Federal Reserve Bank of New York estimated that US firms and consumers are bearing approximately 90% of tariff-related cost increases, putting paid to President Trump’s claims that foreigners would absorb them.
Meanwhile, bond-market investors are showing their concern about hot US inflation with their buy/sell orders.
They have now pushed long-term US Treasury yields to two-decade highs and shrugged off attempts by US Treasury Secretary Scott Bessent to staunch those rising yields by increasing its buyback program of long-term Treasuries from $2 billion to $6 billion. They think the Fed should raise this week and are assigning an 86% chance of a 0.25% hike.
If bond-market investors don’t get the hike they are expecting, they will likely continue to push US Treasury yields higher. That will hurt the US economy more than the Fed holding rates steady for one more meeting would help it. (For example, US fixed mortgage rates are priced on longer-term US Treasuries. Rising yields would push fixed mortgage rates higher and intensify the existing headwind for already beleaguered US housing markets.)
If the Fed does hike next week, as I expect, it will continue a long-standing tradition. Every new Fed Chair since G. William Miller’s appointment in 1978 has overseen a hike as their first move.
The Latest on Mortgage Rates
Global bond yields broke decisively higher last week alongside rising oil prices, which spiked higher in response to the escalating Middle East conflict. Crude oil prices are now back to about $100/barrel, which is where they spiked to in the early days of the US/Iran war.
Canadian lenders began to raise their fixed rates further in response late last week, and that trend is likely to continue over the near term.
Five-year variable-rate discounts narrowed a little as well.
The Bank of Canada’s (BoC’s) most recent hawkish policy-rate statement has bond-market investors now pricing in five 0.25% rate hikes by the end of 2027, with the first expected this December.
I am not yet convinced rate hikes will materialize that quickly or in the quantity expected. But there is no denying the current upward momentum in bond yields and in short-term rate hike expectations.
My Take on Today’s Mortgage Options
I can well appreciate the appeal of fixed-rate stability in our current volatile environment.
Many of the borrowers I work with today are choosing fixed rates, and I’m not trying to talk anyone out of those options. I see the value of certainty in an increasingly uncertain world, even if it comes at higher cost.
When asked for my view on whether a fixed or variable rate is more likely to prove cheaper, I maintain my view that today’s variable rates have the best chance to save borrowers money over their full terms – an admittedly contrarian call right now.
Variable mortgage rates are holding steady, but the backdrop that is holding them in place is anything but stable. Until recently, two competing risks had been roughly offsetting each other: 1) The upside risk that spiking energy prices will lead to generalized inflation, and 2) the downside risk that the US/Canada trade war will disrupt our economy and cause disinflation. But a resurgence in the energy price run-up has already spooked global bond markets, and GoC bond yields are being taken along for the ride.
I still expect the disinflationary impacts from trade uncertainty to last longer than the inflationary impacts from higher energy prices. But for now, higher energy prices are dominating the inflation narrative – and will continue to do so for as long as war rages in the Middle East.
Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must have the financial capacity to withstand higher costs and, in some cases, higher payments.
That said, it is also important to note that fixed rates come with risk. If bond yields rise sharply in anticipation of higher inflation and if inflation doesn’t materialize, anyone who locked in a fixed rate during the run up will be paying that associated premium regardless of any subsequent rate reductions
Insider’s Tip for Borrowers
Borrowers often ask me about the impact that a credit check will have on their scores.
This post demystifies how credit scores are calculated and highlights the factors that matter most.
(Spoiler alert: while a periodic credit check does technically drop your score, the impact is both minor and temporary.)
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This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.
For myriad reasons, often unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed explanation of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (These are not standard and can vary in important ways.)
