Money markets raise Bank of Canada 2026 rate hike bets by 75 basis points

Governor of the Bank of Canada Tiff Macklem listens to questions during a news conference following an interest rate announcement, at the Bank of Canada in Ottawa. THE CANADIAN PRESS/Justin Tang

Money markets raised their bets on a Bank of Canada rate hike on Friday, assigning a more than 20 per cent chance of one next month as the Iran war showed no sign of abating and oil prices rose.

The markets, which are essentially led by the overnight interest rate swap market and had previously priced in a barely four per cent chance of an April hike, now point to a 75 basis point rise in the BoC benchmark policy rate by year-end, LSEG data showed.

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As of Thursday, the markets had priced in only one 25 basis point increase in December.

These markets have turned their bets sharply from expectations of a cut around mid-year to a hike since U.S.-Israeli strikes on Iran began on Feb. 28.

The ensuing conflict has spread across the Gulf and shut the Strait of Hormuz, responsible for almost a fifth of global oil trade. It has also led to a sharp rise in liquefied natural gas (LNG) prices and raised concerns of shortages of fertilizers, threatening global inflation and recession risks.

The BoC has kept its policy rate at 2.25 per cent since October and Governor Tiff Macklem said this week that it had some time to gauge the impact of the Iran war on Canada’s economy but that if energy prices stay high, the central bank would “not let their effects broaden and become persistent inflation.”

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Economists said increasing interest rates in Canada at a time of economic weakness could hurt business and households and that the BoC should stay on the sidelines for the rest of 2026.

(Reporting by Promit Mukherjee; Editing by Alexander Smith)