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

And that makes five: the Bank of Canada opted to keep its trend-setting Overnight Lending Rate at 5% today for the fifth consecutive time, further extending the rate hold that has been in place since July of last year. It also announced it is continuing its policy of quantitative tightening, allowing the bonds it bought up during the pandemic to mature without replacement.

As a result, the Prime rate in Canada will remain at 7.2%, with no upward or downward pressure on variable mortgage rates, and those in variable-rate mortgages won’t see any change to their monthly payments, or the amount of their payment that services interest costs.

Today’s “dovish hold” was widely anticipated by analysts, following a promising January inflation report, in which CPI growth lowered to 2.9% – officially back into the Bank’s 1 - 3% target range. As has been the case with the last several announcements, the tone of the BoC’s language – and whether it contains any forward-looking hints as to when it may start cutting rates – is the main focus.

Inflation remains a key concern

“The Bank’s overall message was that they will continue to wait and see. They want clear data that inflation has been eradicated and they remain ‘resolute’ in their commitment to getting inflation back to target,” says James Laird, Co-CEO of and President of CanWise mortgage lender. 

The Bank concurred that while inflation has softened considerably, it remains above its historical 2% average, with its core measures stubbornly sticking in the 3 - 3.5% range. It also noted that shelter costs continue to be the greatest contributor to inflation, and expects the measure to remain close to 3% before finally lowering in the second half of 2024.

“The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” reads the Bank’s press release. “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.” 

The Bank also pointed to February’s stronger than expected GDP reading, which confirmed the economy has narrowly dodged a recession, though noted that the “pace remained weak and below potential.”

The Bank’s balance act continues

The Bank must walk a cautious line in terms of its language; issuing too optimistic a statement could easily stoke bond markets, and drive inflation higher – the exact opposite of what they’re trying to achieve. Borrowers can likely expect several more rate holds before the central bank is ready to actually loosen its monetary policy.

In an interview with the Financial Post, Derek Holt, Scotiabank’s head of capital markets economics, said that a rate cut this spring “would be about the dumbest thing the central bank could do,” pointing to the rapidly re-heating housing market and anticipated government spending in the upcoming Federal Budget.

“If they cut in (the) spring … I fear it would be a sharp policy error that would thwart prospects for greater policy easing later. Patience may pay if they hold off to evaluate conditions and are ideally able to deliver more meaningful and persistent easing later,” he said, adding that Scotia’s official call is for a cut in September.

The Bank’s most recent hold mirrors that of the US Federal Reserve, which also kept its federal funds rate unchanged in February due to improved inflation, while removing language about the necessity of future rate hikes.

Impact on fixed mortgage borrowers

The bond market has been largely stable in the weeks leading up to today’s announcement, hovering in the 3.5% range. As a result, fixed mortgage rates have softened slightly since the start of the year, easing back below the 5% range to 4.79% for today’s best insured five-year fixed term.

Given markets’ anticipated today’s hold, lenders are unlikely to move the dial further on their fixed-rate pricing, says Laird. “The bond market has been stable, leaving fixed rate mortgages unaffected by this announcement,” he says.

However, he adds, “Short term fixed mortgage rates will remain popular in anticipation of potential rate cuts coming the second half of the year.”

Impact on variable mortgage borrowers

Variable mortgage borrowers are most directly affected by the Bank of Canada’s rate decisions, as lenders based variable mortgage pricing on Canada’s prime rate. As a result of today’s rate hold, those with adjustable-rate mortgages won’t see any change to their payment size.

“Anyone with a variable rate or a home equity line of credit (HELOC) will probably be disappointed that there is no indication of when the first rate cut will occur,” Laird says.

Variable borrowers who are on a fixed payment schedule also won’t see any change to the amount of their payment that goes towards their principal balance, and the risk of these borrowers hitting their trigger rate continues to decrease.

“With rate hikes seemingly off the table, anyone who has not already hit their trigger rate should take comfort knowing that they will remain below that threshold,” Laird adds.

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Impact on the housing market

Canada’s housing market has had a strong start to 2024, with hotter-than-anticipated sales activity in the first two months of the year, as home buyers expect lower mortgage rates in the near future. 

Things are especially heating up in major urban markets; transactions rose by nearly 18% in the Greater Toronto Area in February, and were up over 13% and 23% in Vancouver and Calgary, respectively.

“I was surprised that the Bank did not specifically comment on concern with the early strength in the housing market so far in 2024,” Laird says. “Anyone considering buying their first home should base their decision on their personal situation and not try to predict when the first rate cut will be.”

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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.