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

Could the Bank of Canada’s rate hiking cycle finally be in the rearview? The central bank opted to hold its Overnight Lending Rate at 5% this morning, its second consecutive announcement without an upward tweak, following a similar rate hold in September.

As a result, Canada’s prime rate will remain at 7.2%, meaning the cost of variable borrowing will stay unchanged for the foreseeable future.

“As expected, the Bank of Canada held the key overnight rate at 5%. The Bank remains concerned about the volatility of inflation and the lack of downward momentum of core inflation. The Bank has reiterated their commitment to getting inflation back to their 2% target and will raise rates further if necessary,” says James Laird, Co-CEO of and President of CanWise mortgage lender.

“The Bank is in a wait-and-see pattern right now. They want to watch their rate hikes work their way through the economy to gauge the full impact.”

A widely-expected rate hold

A slew of softening economic data has paved the way for today’s rate hold, and to expectations that interest rates may have passed their peak. In particular, September’s cooler-than-anticipated inflation report, where CPI came in at 3.8%, has stoked confidence that previous rate hikes are indeed working their way through the economy as intended. 

The promising inflation data was further bolstered by a flat month for retail sales and chilling GDP, as well as drooping sentiment among business owners, according to the Bank of Canada’s most recent Business Outlook Survey. The central bank has implemented a total of 10 rate increases – a historic high – between March 2022 and July of this year, delivering a whopping 4.75% increase to the benchmark cost of borrowing.

Keeping a close eye on the data

The chance of a rate hike as forecasted by markets plummeted to just 15% following the inflation report, down from 42% before the release of the data. However, as the growth rate for the CPI still remains above the BoC’s 2% target, the central bank is sticking to its cautiously hawkish tone, stating it will continue to closely monitor incoming data before taking further hikes completely off the table. 

While inflation has eased, its progress has been inconsistent, bouncing from 2.8% in June, to 4% in August, and then down again, points out the Bank. While food inflation is starting to ease, housing costs such as mortgage and rent payments remain high, while core inflation – the Bank’s preferred measure, that strips out energy and food costs – has remain stubbornly flat.

“With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet,” reads the BoC’s announcement. “However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.”

The Bank now projects CPI to average about 3.5% through to the middle of 2024, before easing to its 2% target in 2025 – a sentiment unchanged from their July forecast.

However, analysts largely believe enough progress has been made to foresee rate holds extending into the foreseeable future. In a preview statement released before today’s announcement, BMO economist Benjamin Reitzes wrote that economic growth has been steadily decelerating, a trend that will persist into the second half of the year – which in turn has “sealed the deal” for today’s hold.

“Most data points suggest that the Bank of Canada has done enough and should be moving firmly to the sidelines,” he writes. “While inflation is still well above target, which will keep the BoC talking hawkishly for now, it is a lagging indicator, and the weak GDP growth outlook points to further disinflation ahead. Assuming growth doesn’t stage a surprising comeback, the Bank of Canada should be increasingly comfortable keeping policy rates steady.”

Variable borrowers to feel relief… but uncertainty persists

As lenders use Canada’s prime rate to set their variable cost of borrowing, those with floating variable rates won’t see any change to their rate for the time being. Those with variable mortgage rates who are on a fixed payment schedule, also won’t see any change in the amount of their payment going toward their principal balance, and will be less likely to hit their trigger rate. Those shopping for today’s best variable mortgage rate can expect the lowest pricing to be in the 5.95 - 6.10% range.

“This announcement contains mixed news for both fixed and variable-rate mortgage holders. Those with a variable-rate mortgage or a home equity line of credit (HELOC) will be pleased that the Bank has held the key overnight rate, however, these households will be feeling uncertain about how long rates will stay elevated,” says Laird.

Little change in store for fixed mortgage rates

Unlike variable mortgage rates, which are directly influenced by the Bank’s decisions, fixed mortgage rates are based upon prices in the bond market, the proceeds of which are used by lenders to fund mortgages.

Both Canadian bond yields and US treasuries have hovered around multi-decade highs in recent weeks, as investors react to ongoing geopolitical instability, as well as overall malaise over central banks’ “higher for longer” messaging. 

The government of Canada five-year bond yield is currently in a 4.2% range and has soared as high as 4.4% this month – a high not seen since 2007. As a result, lenders have been steadily increasing their fixed mortgage rates, with today’s lowest five-year fixed sitting at 5.64%. However, as markets had largely already priced in today’s rate hold, the announcement has caused little movement among yields thus far.

“There was little reaction in the bond market to this announcement, as it contained no major surprises. This means that fixed rates will stay similar to their current elevated level,” Laird says. 

“Anyone shopping for a home or who has a mortgage up for renewal should hold a rate now to protect against any further rate increases.”

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Housing market to remain stagnant as rate stay elevated

Stabilizing interest rates may motivate some of the would-be home buyers who’ve remained sidelined in recent months, but the reality for most is that overall affordability remains too far out of reach – and that won’t change until either the Bank cuts rates, or the bond market eases up substantially on the fixed cost of borrowing.

A recent study conducted by found that – despite falling home prices in markets across the country – overall affordability factors worsened for home buyers in September as the mortgage stress test hovers around the 8.2% threshold. As well, expectations that rates will be elevated for the longer term have further discouraged buyers and sellers alike, leading to a decline in national real estate sales of -1.9% between August and September – typically a seasonally active time for the market.

“The impact of higher rates is becoming apparent in the real estate market across the country,” Laird says.

“Momentum in the real estate market across the country has slowed. Inventory is building, the number of transactions are decreasing and prices are softening. This is particularly true in the condo market. Anyone looking to buy a new home and sell their existing home should probably sell first and then purchase once they understand their sale price.” 

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