The BoC Rate Sees No Change, Despite High Inflation
November 4, 2021 | Buying
Canada’s central bank, which sets the cost of borrowing among the country’s consumer lenders, opted in Late October to keep its trend-setting Overnight Lending Rate untouched at 0.25%, where it has remained since March 2020.
Since the start of the pandemic, the Bank of Canada has used their rate to keep the overall cost of borrowing low for Canadians, in an effort to stimulate the economy and keep credit flowing. Now that the economy has found its way to recovery mode, the BoC is in a sticky position maintaining this rate as inflation hits new heights.
Inflation reaching new heights
We’ve all noticed the effects of inflation in our day to day lives lately. In September the Inflation rate hit a nearly 20-year high as it reached 4.4%. According to Statistics Canada, this is largely driven by the rise of fuel and food prices, as well as the challenges seen in the global supply chain.
If the stat of 4.4% doesn’t mean anything to you, for comparison; during non-pandemic times, generally an inflation rate ceiling of 2% is kept by the BoC.
While this increase in inflation has been recognized by the BoC as “stronger and more persistent than expected”, the first rate hike won’t occur until the middle to end of 2022. This is due to the BoC’s commitment to its current approach and belief that inflation will normalize.
“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved,” states the BoC in their October announcement. “In the Bank’s projection, this happens sometime in the middle quarters of 2022.”
Further explanation for the rate hold is that despite re-opening economies, as well as a booming housing market, shortages and logistical challenges in global trade have limited full growth potential of the economy.
Fixed rates to rise
In Late October the BoC did make an announcement of change that will have some immediate effect on consumers; they decided to put an end to their quantitative easing program, meaning that they will no longer be pumping $2 billion into the government bond market on a weekly basis.
Why does this matter? Because this will push the yields of those bonds higher, in turn driving the price of fixed mortgage rates.This is because, similar to the impact of the BoC’s Overnight Lending Rate on variable rates, consumer lenders also take their cue from the bond market when pricing fixed rate products (such as mortgages). As yields were rising at an increased pace, even before the BoC’s decision to end QE – fixed rates are on track to continue to go even higher.
What does this mean for your mortgage rate ?
Now to get to what you really want to know… If you are currently locked into a fixed- rate mortgage, this announcement will not have an immediate impact on you, seeing as your rate will not change until your term is up. However, If you are someone that is currently shopping fir a fixed rate, or you are coming up to a renewal or refinance; you may find that you are in a higher interest rate environment, seeing offerings a percentage point or so higher than what we have seen the past six months.
Variable rate mortgage holders also won’t see an immediate change, however, they should be mindful that increases are to come in 2022. While the hike that the BoC has indicated isn’t set to occur until the later half of 2022, it is not known how many times they will hike once they start to do so.
So where does this leave us? Analysts appear to be split on the matter of post pandemic rates, however Scotiabank’s head of capital markets calls for a total of eight hikes to happen between 2022 and 2023, believing that it will then settle at 2.25%
While it is still too soon to determine of such a dramatic increase is in fact in the cards post pandemic, one thing is for sure – borrowers of all kinds should be monitoring the rate trends to ensure educated decisions as the economy continues to shift towards “normal”.
