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

Variable-rate mortgage holders can let out a sigh of relief this morning as the Bank of Canada has signalled an end to interest rate hikes – for the time being, at least.

In their latest rate announcement, the central bank opted to maintain its benchmark Overnight Lending Rate at 5%. As a result, the Prime rate in Canada will remain at 7.2%, and those with market-facing floating debt – such as adjustable variable mortgages and lines of credit – won’t see any change to their monthly payments.

“Many of the data points that the Bank uses in assessing its decision supported a hold. This includes the Q2 economic contraction in Canada, slowing consumer consumption, softening housing market, and easing in the labour market,” says James Laird, Co-CEO of and President of CanWise mortgage lender. “However, inflation itself remains stubborn and higher than the Bank’s target. The Bank made it clear that they will achieve their 2% inflation target, even if that means raising rates higher in the future.”

Today’s decision to leave rates unchanged will usher in a badly-needed era of stability for mortgage rates. It was also widely anticipated by analysts and markets; despite a hotter-than-expected July inflation reading of 3.3%, second-quarter GDP came in surprisingly soft, with growth virtually unchanged compared to the first three months of the year. That’s a strong indicator that the economy is indeed cooling as a result of previous rate hikes, making the case for the central bank to ease off its monetary policy gas pedal.

However, the Bank has emphasized it will remain firmly data dependent when deciding whether it will stick to this hold for the long term. 

“Canadians should continue to budget for further rate increases, because the Bank has been clear that they will raise rates further if inflation remains above target,” adds Laird.

As the Bank states in its release, “With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.”

The Bank acknowledged that while July’s inflation numbers surprised on the upside, they remained within the realm of its 3% projection, with core inflation running close to 3.5%. It anticipates that, due to higher gas prices, inflation will remain elevated in the near term before materially declining. This remains a risk as, “The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.”

Stability ahead for both fixed and variable mortgage rates

The Bank’s decision to hold follows one of its steepest hiking cycles in history, having increased its rate a total of 10 times over the last 18 months. While it reverted to a brief rate hold stance in January of this year, stubbornly-hot inflation forced another two rate increases in June and July. In total, the Bank’s benchmark rate has increased 4.75% since the rate hikes began, sharply altering the cost of borrowing for Canadians; prior to the hiking cycle, the Overnight Lending Rate was at an all-time low of 0.25% as a means of pandemic economic stimulus.

As a result, variable mortgage rates have soared drastically, with the lowest available option rising from 0.89% back at the start of 2022 to the 6% range today. That’s put a considerable squeeze on all borrowers, whether they’re shopping for a new mortgage or coming up for renewal. Borrowers with adjustable variable mortgages have seen their payments increase with each rate hike, while those on fixed payment schedules have seen less and less of their payment contribute to their principal debt, with many ultimately hitting their trigger rate or point. 

“Anyone with a variable-rate mortgage or balance on a home equity line of credit (HELOC) will be pleased that their rate has not gone up further,” says Laird. “Anyone that requires a mortgage in the fall – fixed or variable – will also be pleased with this rate hold.”

Also read: Think mortgage rates will drop? The argument for getting a variable rate now

Fixed mortgage rates, while not directly influenced by the Bank of Canada, have also spiked over the same time frame, due to volatility in the bond market. As a result, the mortgage stress test – the affordability threshold all new borrowers must prove they can pass before getting a mortgage – has risen to 8%. According to a recent study by, this has further eroded real estate affordability across Canada, with higher rates even offsetting cooler housing prices in some markets.

“Fixed rates will remain stable at their current level as a result of this rate hold,” says Laird. “Anyone who is considering purchasing a home should get a pre-approval to hold the current rates for 120 days, which protects them if rates do rise further.”

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How will today’s Bank of Canada announcement impact the housing market?

While borrowing and real estate costs remain historically high, today’s rate hold could provide enough motivation for sidelined buyers to return to the market, perhaps giving the fall season a boost in terms of transactions. This would mirror the uptick the market enjoyed in the early months of the year, following the Bank’s short-lived rate hold; home sales steadily rose between January to April with over $100,000 in price recovery before returning hikes deflated market demand.

“Time will tell how much confidence this gives potential buyers to go out and buy a home in the fall. It is possible even with this rate hold that elevated rates keep potential home buyers on the sidelines,” Laird adds.

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