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Bank of Canada holds target Overnight Rate at 4.5%

The Bank of Canada made good on their vow to stabilize rates today, maintaining their benchmark cost of borrowing at 4.5%. This “conditional pause” – which the central bank stated it will commit to as long as inflation trends lower – was widely anticipated, with a 99% likelihood priced in by the markets.

As a result, the Prime rate used by consumer lenders to set their variable-rate mortgage and borrowing products will remain at 6.7%, with no change for mortgage and home equity line of credit (HELOC) rates.

Today’s hold is the first following eight consecutive rate increases as of last March. This historically steep hiking cycle has driven the BoC’s key Overnight Lending Rate from a pandemic low of 0.25% to 4.5% today. That 425-basis-point uptick has caused variable rates to soar, with the best five-year variable mortgage rate rising from 0.9% at the start of 2022 to 5.55% today.

The Bank has had to aggressively raise rates in order to reduce inflation, which hit a 40-year peak of 8.1% this June. Recent data has suggested higher interest rates are starting to be effective, with the January CPI report showing a rate of 5.9%. While that’s still well over the BoC’s mandated 2% target, today’s announcement offers some long-awaited optimism.

“This is as good an announcement as we could have expected, where the Bank has recommitted to holding rates,” says James Laird, Co-CEO of and President of CanWise mortgage lender.

“The Bank views inflation as moving in the right direction. Though they still have lingering concerns, the Bank feels they have gone far enough to get inflation back to where they need it to be. Moving forward, as long as trends continue, the rate hikes should be over for the remainder of this year.”

The impact on mortgage borrowers

Today’s rate hold spells some – small – relief for those with variable-rate mortgages, who have seen their interest rate spiral higher with each rate hike. Payments for those on a variable schedule will now remain unchanged for as long as the central bank sticks to its new status quo.

“Variable rate holders and those with a balance on a home equity line of credit (HELOC) will breathe a sigh of relief, as it is the first time their rate has not increased in a year. They will also be pleased that the Bank is signalling that there are no more rate hikes to come. This means anyone who hasn't already hit their trigger rate is unlikely to do so,” says Laird.

According to a study from National Bank, up to eight in 10 variable borrowers who took their mortgage out between 2020 and 2022 have hit their trigger rate – when monthly mortgage payments cover interest only –  with three-quarters of variable-rate holders on a fixed payment schedule.

In all, an average variable-rate mortgage holder has seen their monthly payment increase by $1,514 per month (totalling $18,168 per year), as a result of the BoC’s eight rate hikes – a 59% increase. This is based on a homeowner making a 10% down payment on a $748,450* home with a 5-year variable rate of 0.90%,** amortized over 25 years.

Fixed mortgage-rate borrowers won’t be directly impacted by today’s announcement, but will see its effects on fixed mortgage pricing via performance in the bond market, which is highly reactive to the central bank’s actions.

“With the Bank's view remaining largely unchanged from their January announcement, fixed rates should remain flat,” Laird adds. “Anyone who needs a fixed rate in the coming months should get preapproved, this will protect them from any unexpected rate increases.”

Five-year government yields, which lenders largely use to set their fixed rates, have trended higher in recent weeks, which have pushed the lowest discounted five-year fixed mortgage rates up to 4.69%. It’s possible today’s positive inflation commentary will effectively calm yields in the short term, but that remains unpredictable given the mixed bag of economic data that’s currently informing the market – especially in the US.

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How long will the Bank of Canada hold rates?

The biggest risk posed to the BoC’s rate hold comes from its American counterpart; the US Federal Reserve is fighting its own inflation battle, and progress has not been as swift south of the border.

Just this week, US Federal Reserve Chair Jerome Powell made statements to Congress that reinforced expectations that the American central bank will likely need to raise its own interest rate more than previously expected, as US CPI and labour numbers remain stubbornly high. His comments sent the stock market reeling and bond yields surging; analysts now expect the Fed to implement 25-bps hikes at both their March and May meetings, which would bring their policy rate to a peak range of 5.00% to 5.25%. 

However, while the Fed’s hawkish stance certainly puts pressure on the BoC, analysts think our central bank will be able to stick to its plan to hold rates for the remainder of the year, as long as inflation plays along.

“After hiking by 25 basis points in January, our Canada team is expecting the BoC to hold rates constant at its March meeting at 4.50% for the remainder of 2023. However, the trajectory of inflation and inflationary pressures will be key for the April meeting, where the Bank will provide updated economic forecasts,” wrote analysts from Morgan Stanley.

Today’s announcement certainly reassures that the data is positive; while the BoC does nod at US inflation as a downside risk, it reiterates that the global economy is performing in line with its outlook.

“Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4½%,” writes the Bank. “Quantitative tightening is complementing this restrictive stance. Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

The bottom line

After a year of steadily rising mortgage costs, today’s rate hold ushers in a period of stability, which in turn should support affordability, as well as the recovering housing market.

“Overall, most Canadians will be pleased to actually see the end of the rate hike cycle. Canadians should feel reassured that the incoming data so far in 2023 is largely in line with what the Bank was expecting,” says Laird.

“This announcement provides more certainty that the rate hikes are finished, which should provide stability for current home values. It supports the expectation that homebuyer demand will return later in the spring. Home prices should not fall further than the current home value floor.”

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*January 2022 average home price in Canada was $748,450 (CREA)

**The best 5-year variable mortgage rate a homebuyer could get in January 2022