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Bank of Canada keeps overnight rates at 0.25% while fixed mortgage rates rise (March 2021 update)

The Bank of Canada has announced it will be keeping its target for the overnight rate at 0.25%, marking almost 12 months since it initially slashed rates in response to the COVID-19 pandemic.

The Bank initially cut the rate to 0.5% on March 13 2020, before cutting it again to 0.25% two weeks later, where it’s been ever since. Today, in March 2021, the Bank reiterated that it would leave the rate at 0.25%, its “effective lower bound”, until “the 2 percent inflation target is sustainably achieved”.

The bank said that its January projections indicated that stable 2 percent inflation is not likely until 2023.

Signs of economic recovery

The Bank’s decision to keep rates low comes despite wider signs of recovery in the economy. James Laird, Co-founder of and President of CanWise Financial mortgage brokerage, says there are several economic factors the Bank acknowledges are doing well.

“The Bank has reaffirmed its forecast for holding rates until 2023, despite the notable positive signs they are seeing of recovery”, James says.

“Factors such as increasing commodity prices, declining infection rates, strong housing market activity, and the recently announced US fiscal stimulus, have caused bond yields in Canada to rise by approximately 50 basis points.”

In its statement, the Bank says that despite positive signs, the recovery still requires extraordinary monetary support in the way of low interest rates and a continuation of its quantitative easing program. Consequently, there is no Bank of Canada interest rate hike anywhere on the horizon. 

Fixed rates begin to climb

Despite the Bank of Canada interest rate being kept on hold, mortgage providers are beginning to increase their fixed mortgage rates in response to increasing bond yields. James says there may be more increases on the way.

“In reaction to rising bond yields, fixed mortgage rates began increasing two weeks ago and continue to do so. Many lenders have increased their 5-year fixed rate twice in the last two weeks by an average of 40 basis points.

“Those lenders that have not increased their fixed rates a second time are expected to do so by the end of this week.”

As a result of fixed rates rising, James says new mortgage customers may increasingly look to variable-rate mortgages, which may offer a better deal.

“Variable-rate mortgages remain unchanged and with the rising fixed rates they are becoming more attractive. Canadians who get a new mortgage in the coming months may increasingly choose variable over fixed as the difference between the two rates widens.”

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