The Bank of Canada is widely expected to hold its policy rate at 2.25 percent when it announces its decision on March 18. Markets are pricing a 92 percent probability of no change. The shadow governing council, a 10-member panel of economists, unanimously agrees. National Bank, TD, CIBC, and RBC all forecast the rate staying at 2.25 percent through the end of 2026.
On the surface, this looks like a non-event. The overnight rate has been parked at 2.25 percent since October 2025, after a cutting cycle that brought it down from 5.00 percent. The easing cycle appears to be over. For anyone watching only the policy rate, there is nothing to see here.
But the policy rate is not where the action is right now. The action is in the bond market, and the bond market is responding to something the Bank of Canada cannot control: the price of oil.
On February 28, U.S. and Israeli forces launched strikes against Iran. Iran responded by attacking commercial shipping in the Persian Gulf and partially blockading the Strait of Hormuz, through which roughly one-fifth of the world's oil supply moves. Brent crude jumped 8 percent overnight, from $71.32 to $77.24 per barrel, and has since climbed past $100 before settling around $90.
The initial bond market reaction followed the textbook playbook. When the strikes were confirmed, investors bought government bonds as a safe haven. The U.S. 10-year yield briefly dipped to 3.93 percent. That lasted less than 48 hours. Once the Strait of Hormuz disruption became real and oil prices surged, the inflation calculus changed instantly. Bond yields reversed and climbed.
In Canada, the 5-year Government of Canada bond yield has jumped from 2.7 percent to 3.0 percent, its highest level since the start of 2026. This matters enormously because Canadian lenders price their fixed mortgage rates off the 5-year bond yield. When yields rise, fixed rates follow.
The transmission has already begun. Since the conflict started, lenders have increased 5-year fixed mortgage rates by 10 to 25 basis points, or roughly 0.10 to 0.25 percent. That may sound small, but on a $10 million multifamily acquisition financed at 75 percent loan-to-value, a 25 basis point increase in the mortgage rate adds approximately $18,750 per year in debt service costs. Over a 5-year term, that is nearly $94,000.
For operators working with CMHC-insured financing through programs like MLI Select, the math is somewhat buffered. Insured rates remain lower than conventional financing. But even insured rates are tied to bond yields, and the spread has widened as lenders price in geopolitical uncertainty.
The timing is particularly challenging because Canada is in the middle of a historic mortgage renewal wave. CMHC estimates that 1.5 million households renewed their mortgages by the end of 2025, with another million set to renew in 2026. Many of these borrowers locked in at rates below 3 percent during the pandemic era. They are now renewing into a market where 5-year fixed rates sit north of 4 percent, and the Iran conflict has pushed that number higher still.
For multifamily investors in Ontario secondary markets, the picture is nuanced. The overnight rate holding steady at 2.25 percent is good news for variable-rate borrowers and for the general direction of short-term financing costs. But the bond yield spike means that anyone locking in a new fixed-rate mortgage today is paying more than they would have a month ago.
The key question is whether this is temporary or structural. If the Iran conflict resolves quickly and oil supply normalizes, bond yields could retreat and fixed rates would follow. Morgan Stanley and other analysts have noted that the current yield spike is driven primarily by oil-linked inflation expectations, not by a fundamental reassessment of Canadian economic strength. If oil falls back below $80, the 5-year yield could return to the 2.7 to 2.8 percent range.
But if the Strait of Hormuz remains disrupted for months, the picture changes. Sustained oil prices above $90 per barrel would feed into Canadian headline inflation, potentially forcing the Bank of Canada to reconsider its hold stance. The shadow council currently sees the rate staying at 2.25 percent through at least September 2026, but that consensus was formed before the full extent of the Hormuz disruption became clear.
For investors underwriting deals today, the practical takeaway is straightforward. Stress-test your assumptions. If you were modeling a 5-year fixed rate at 4.0 percent, model a scenario at 4.5 percent. If your deal only works at the lower number, it may not be the right deal for this moment. Patient capital has an advantage here. The operators who can wait for clarity on oil prices and bond yields before locking in long-term financing will likely get better terms than those who need to close immediately.
The Bank of Canada will almost certainly hold tomorrow. But the rate that matters most to real estate investors right now is not the one the Bank controls. It is the one the bond market is setting, and the bond market is watching the Strait of Hormuz.