Weak GDP Data Makes Bank of Canada Rate Cut More Likely

May 29, 2026

Canada’s economy continues to struggle for momentum, with quarterly GDP contracting for the second straight quarter, marking the first technical recession since the pandemic. However, there may be a silver lining regarding mortgage interest rates as the Bank of Canada is more likely to cut its policy interest rate and decrease borrowing costs.

Growing expectations of a US-Iran peace deal have sent bond yields lower, assuaging worries of increased borrowing costs. The Canadian 5 year bond yield, a key benchmark for 5 year term mortgages, has declined by about 30 basis points (or 0.3 percentage points) since May 19th. While yields remain somewhat elevated compared to one year ago, some recent developments will bring some much-needed downward pressure.

US President Trump has claimed that a deal to reopen the Strait of Hormuz is imminent many times since the ceasefire the April 7th cessation of hostilities between the United States and Iran. Although it appears that markets are convinced that his most recent claims are the real deal, as Brent crude prices declined to the lowest level since the announcement of the ceasefire.

A reopening of the strait would slowly lead to about 20% of the world’s energy gradually re-entering the global market, tampering inflation and increase economic stability. If all goes to plan, then borrowing costs, including average mortgage rates, will not rise as the Bank of Canada cuts or holds rates at its June 10th meeting.

However, the Iranians are consistently more pessimistic about the negotiations than the Americans, who have a greater incentive to keep oil and gas prices low by talking up the prospects of a deal. As of today, neither side has signed off on the terms currently being proposed. So, keeping an eye on Iranian media will offer us an important clue on whether a deal is truly imminent.   

Sources: Trading Economics