Despite bond markets predicting interest rate hikes as early as the first quarter of 2022, the Bank of Canada (BoC) stuck to its script that rates should remain low until the “middle quarters” of next year.
This suggests the first rate hike will come anytime between April and September, although odds are currently pointing to early rather than later.
The economy continues to require “considerable monetary policy support” due to excess capacity, the Bank said following its interest rate decision Wednesday morning, in which it left its overnight target rate at 0.25%, where it’s been since March 2020.
“Recent economic indicators suggest the economy had considerable momentum into the fourth quarter… [but] the devastating floods in British Columbia and uncertainties arising from the Omicron variant could weigh on growth by compounding supply chain disruptions and reducing demand for some services.”
The Bank said it remains committed to holding the policy rate in place “until economic slack is absorbed” to achieve 2% inflation, which the Bank sees happening “sometime in the middle quarters” of 2022.
BoC Monitoring Elevated Inflation
The Bank noted that CPI inflation remains elevated, impacted in part by global supply constraints.
“The Bank is closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation,” read the statement.
“The Bank used this line verbatim in October with the only distinction being it had previously characterized the forces pushing up prices as ‘temporary,’” analysts with National Bank of Canada wrote.
“[Regarding] inflationary pressures, the narrative was broadly the same, though there were some subtle changes of note. On balance, these changes were slightly more hawkish. But in any case, we still feel the Bank is downplaying the inflation backdrop.”
The Bottom Line
Anyone with a variable rate mortgage should expect an initial rate hike in April, May or June of 2022. They should ensure their household budget can handle a slightly higher mortgage payment.
Anyone shopping for a home should make sure they get pre-approved in order to hold today’s fixed rates for four months. With a pre-approval, you can still get a lower rate if rates go down, but if rates go up, the rate you were pre-approved for is protected.
For Canadians choosing between a fixed versus variable mortgage rate, the right choice for any risk-averse Canadians is fixed, however households that can accommodate more risk should not rule out a variable rate. Even in this rising rate environment, there would need to be four to six Bank of Canada rate hikes before today’s variable rate would be equal to today’s fixed rate.
The Bank of Canada’s next scheduled policy announcement is Wednesday, January 26, 2022.
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors