Quick takes:

• President Trump declared the U.S.-Iran ceasefire over on Wednesday after Iran attacked three commercial ships in the Strait of Hormuz earlier in the week, sending Brent crude up 5% to $78 per barrel and reversing weeks of post-deal declines.

• The Bank of Canada's Q2 Business Outlook Survey showed sentiment deteriorating after three quarters of improvement, with the share of firms expecting a recession nearly doubling from 9% to 17% and more firms expecting their prices to rise on higher energy costs.

• Canadian consumers expect inflation of 4.1% over the next year and 4.0% over two years, with 70% expecting the Middle East war to push prices higher, according to the Bank of Canada's consumer survey released the same day.

• The FOMC minutes confirmed the Fed's hawkish turn, with 9 of 18 officials projecting at least one hike by year-end and the median inflation forecast marked up to 3.6% from 2.7%, while futures now price a 31% chance the Fed hikes at its July 29 meeting.

Three weeks ago, falling oil prices and a signed peace deal made the case that inflation relief was on the way and Bank of Canada rate cuts might follow. That case collapsed this week. On Wednesday, President Trump declared the U.S.-Iran ceasefire over after Iran attacked three commercial ships in the Strait of Hormuz, sending oil prices back toward $78 per barrel.

The same week brought two more signals pointing in the wrong direction. On Monday, the Bank of Canada's own surveys showed businesses and consumers both expecting higher inflation, with recession fears among firms nearly doubling. Then on Wednesday afternoon, the Federal Reserve released minutes confirming its hawkish turn, with nine of 18 officials projecting rate hikes by year-end.

The peace deal is over

Signed remotely on June 17, the Islamabad Memorandum lasted just three weeks before falling apart. Iran attacked three commercial vessels in the Strait of Hormuz on Monday and Tuesday, and the United States responded with strikes on Iranian targets for two consecutive days. On Wednesday, Trump declared from the NATO summit in Ankara that the ceasefire was over.

Oil markets reacted immediately. Brent crude jumped 5% to $78 per barrel on Wednesday, reversing weeks of post-deal declines that had taken the price below $74. The United States also revoked a waiver that had allowed Iran to sell crude through August, cutting off the supply that had been helping to push prices down.

The collapse erases the one force that had been working in favour of Canadian inflation. Falling oil after the peace deal was the main reason the Bank of Canada might have been able to cut later this year. With Brent back near $78 and the Strait of Hormuz once again contested, gasoline prices are heading higher, not lower, and the 3.2% May CPI reading now looks like a floor rather than a peak.

Businesses and consumers both see higher inflation

On Monday, the Bank of Canada released its Q2 Business Outlook Survey and companion Consumer Expectations Survey, both conducted in May. The results arrived just as the peace deal was falling apart. Both painted the same picture: inflation expectations are rising, and the economic outlook is darkening.

Business sentiment deteriorated after improving for three consecutive quarters. The share of firms planning or budgeting for a recession nearly doubled from 9% to 17%, and more firms now expect their input and selling prices to rise, reflecting higher global oil prices. Oil producers revised their capital spending upward, signaling that the industry itself expects elevated prices to persist.

Consumers told a similar story. One-year inflation expectations held at 4.1%, while two-year expectations rose to 4.0% and five-year expectations climbed to 3.4%. About 70% of consumers expect the war in the Middle East to raise inflation over the next 12 months.

High prices are already changing behaviour. Consumers reported that elevated gasoline costs are holding back spending on travel, dining, and major purchases. That combination of rising inflation expectations and falling spending plans is the worst of both worlds for the Bank of Canada, because it means inflation is not self-correcting through reduced demand.

The Fed confirmed its hawkish turn

Wednesday's release of the FOMC minutes from the June 17 meeting removed any remaining doubt about where the Federal Reserve stands. The minutes confirmed that the committee prioritizes price stability over employment, with officials expressing concern that inflation has reaccelerated despite the rate cuts that began in September 2024. Nine of 18 officials project at least one rate hike by year-end, while eight expect no change and just one still sees a cut.

The inflation numbers behind those projections tell the story. Officials marked up their median forecast for headline inflation in 2026 to 3.6% from 2.7% in March, driven by the same two forces affecting Canada: energy costs from the Middle East and demand-side pressure from the AI boom. Futures markets now price a 31% chance the Fed hikes at its July 29 meeting.

For Canadian mortgage rates, the Fed's stance matters directly. U.S. Treasury yields set the floor for Government of Canada bond yields, and GoC yields drive fixed-rate mortgage pricing. When futures price the fed funds rate heading toward 4% by year-end, that pressure flows through to Canadian fixed rates regardless of what the Bank of Canada does.

What this means for the July 15 decision

Next Wednesday's Bank of Canada announcement carries extra weight because it comes with the July Monetary Policy Report. The MPR will contain the Bank's updated projections for inflation and growth, and those numbers will signal whether Macklem sees the current situation as temporary or structural. Bond markets currently price a 78% chance of a hold and a 22% chance of a hike, with zero odds of a cut.

Variable-rate borrowers should watch the decision closely. A hold keeps variable rates where they are, but the 22% hike probability is sharply higher than the 15% priced just two weeks ago, and a 25-basis-point increase to 2.50% would flow directly through prime to every variable-rate mortgage in the country. Even if Macklem holds, hawkish language in the MPR could push hike odds higher for September 2.

Fixed rates face pressure from both sides of the border. The Fed's hawkish minutes keep U.S. Treasury yields elevated, dragging GoC bond yields higher and maintaining the floor under Canadian fixed rates. If the Bank's own MPR marks up its inflation forecast significantly, that would add domestic upward pressure on yields on top of the U.S. spillover.

What could change the picture

The most important signal will come from the MPR itself. If the Bank's projections show inflation returning to 2% by mid-2027 without a rate hike, Macklem can justify holding through the fall and waiting for energy prices to stabilize. Should the projections show inflation staying above target through 2027, the market will read that as a signal that a hike is coming.

On the geopolitical front, Trump said on Wednesday that the exchange of fire would not lead to long-term military action, leaving open the possibility of renewed talks. However, with the crude sales waiver revoked and U.S. strikes ongoing, the path back to a functioning ceasefire is far narrower than it was three weeks ago. Oil prices would need to fall back below $75 and stay there for gasoline relief to show up in the CPI data.

Next week's U.S. CPI data could shift the Fed's calculus before its July 29 meeting. A softer reading could temper the 31% hike odds and ease some of the pressure on Treasury yields. But the minutes made clear that inflation, not employment, is what drives the committee now.

Bottom line

Three weeks ago, the outlook for Canadian mortgage rates was cautiously optimistic: oil was falling, a peace deal was in place, and the path to Bank of Canada rate cuts seemed plausible. Since then, all three of those assumptions have been swept away in the space of a single week, replaced by a collapsing ceasefire, rising inflation expectations, and a Federal Reserve moving toward hikes.

For mortgage holders, the July 15 decision is the one to watch. A hold is still the most likely outcome, but the Monetary Policy Report will tell Canadians whether the Bank sees a hike on the horizon. If it does, the rate relief that borrowers have been waiting for is not coming any time soon.