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Bank of Canada holds target interest rate at 5% in January 2024 announcement

The Bank of Canada has kicked off the new year with a rate hold, ushering in another holding pattern for variable-rate borrowers. This marks the fourth consecutive rate announcement with no change, as the central bank continues to closely monitor economic capacity and inflation.

As a result, the bank’s trend-setting overnight lending rate remains at 5%, with the Prime rate in Canada at 7.2%. As this is the basis used by lenders when setting their variable cost of borrowing, those with variable-rate mortgages won’t see any change to either their payment amount, or the portion of their payment that serves their interest costs.

“The Bank surprised no one by holding the overnight rate,” says James Laird, Co-CEO of and President of CanWise mortgage lender. “They continue to balance the downward pressure of high rates on the economy with getting inflation back to target.”

Inflation raises doubt over rate cut timing

Today’s rate hold was widely expected by economists, despite a hotter-than-anticipated inflation reading for the month of December, with a headline number of 3.4% – higher than the 3.1% recorded in November. While this was largely attributed to an unattractive “base-year” effect in gas prices, core inflation metrics – which are most closely watched by the central bank – also increased beyond expectations, at a combined 3.65%.

That’s had markets somewhat shaken, as fears re-emerged the Bank may need to stick to its “higher-for-longer” stance for an extended period of time; its most recent series of rate hikes, which extended between March 2022 and July 2023, have been in efforts to reign inflation back to a target of 2% after peaking at 8.1% last June.

Concern that the measure may not yet be under control has renewed doubts over when the Bank may actually cut rates. According to data compiled by Refinitiv Eikon, markets had priced in an 87% chance of a cut as early as April, which fell to 74% after the inflation reading came out. 

“My expectation is that rate cuts will come later and will be of a lower magnitude than most are anticipating,” Laird adds.

Higher rates “need more time”

With today’s rate hold largely set in stone, market watchers have been keen to comb through the Bank’s accompanying commentary for direction on where – and when – rates may go next. 

In a statement released this morning, Bank Governor Tiff Macklem enforced the Bank’s “wait-and-see” stance, saying the “discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level.”

Macklem stated that “monetary policy is working to relieve price pressures,” as higher interest rates are effectively pulling down economic demand, but that “inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work.”

What’s notable is that the Bank is increasingly optimistic that economic activity is no longer outpacing supply, which will help ease inflation's growth. 

However, it remains concerned over inflation’s outlook, pointing to the stubborn core measure, and noting that mortgage interest, rising rents, and other housing costs remain top contributors to growing CPI.  It expects that inflation will stick close to the 2% range in the first half of 2024, before finally achieving 2% in 2025. Overall GDP is to grow 0.8% this year, and 2.4% next, which remains in line with the Bank’s October projection.

“Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour,” states the rate announcement release. “The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Impact on fixed mortgage rate borrowers

Today’s announcement won’t cause much of a ripple among fixed mortgage rates; as bond investors had heavily anticipated this morning’s rate hold, yields are largely unchanged following the announcement.

However, there could be some upward pressure on rates from lenders who had held off on increasing their pricing in recent weeks, when yields did move upward; after peaking at 4.42% last October, the five-year government of Canada yield dipped as low as 3.1% at the end of December, before ticking back up to the 3.5% range in reaction to the stronger inflation number.

That’s caused a slight roller coaster in fixed-rate pricing, as some lenders cut their five-year options toward the end of the year, before walking them back in recent weeks.

“After December’s surprisingly high inflation figure, bond yields had pushed up and remained elevated versus where they were in mid-December. Some mortgage lenders have held off increasing their fixed rates in order to see what the Bank of Canada was going to say,” says Laird. “Lenders will consider moving fixed rates higher since there is no new information from the Bank this morning.”

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Impact on variable mortgage rate borrowers

Variable-rate holders will benefit the most directly from today’s rate hold, as their borrowing costs will stay stable for the foreseeable future. Those with adjustable-rate mortgages, which see payments ebb and flow with the Bank’s rate direction, will remain unchanged.

Those who are on a fixed payment schedule won’t see any change to the portion of their payment that goes towards their principal balance, and those who have not yet hit their trigger rate – the point at which their payment only covers interest – are unlikely to do so. According to the Bank of Canada’s own research, 80% of variable borrowers on fixed payment schedules had hit their trigger rate by November 2023, as a result of its previous hiking cycle.

“Anyone with a variable-rate mortgage or HELOC will be disappointed that there were no hints as to when they can expect the first rate cut,” Laird adds.

Impact on housing market

Borrower sentiment in regards to today’s rate announcement will be what makes or breaks this year’s spring market – but with little to go on from the Bank, it’s unlikely sidelined buyers will rush back in.

“This announcement will not have much of an effect on home values,” says Laird. “Any indication of rate cuts from the Bank of Canada would have put upward pressure on home prices immediately.”

While national home sales surged unexpectedly in December, 2023 as a whole marked an -11.1% sales decline from 2022, the lowest for activity since the 2008 recession.

The Canadian Real Estate Association is calling for largely flat growth over 2024, as the impact of higher rates continues to be felt among markets, despite built-up buyer demand. However, should interest rate cuts materialize, 2025 is promising to see an uptick in sales.

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Penelope Graham, Director of Content

Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.