The Bank of Canada opted to leave its Overnight Lending Rate untouched at 4.5% for the second time in a row today, further committing to its rate hold stance despite a recent slew of stronger-than-expected economic data.
However, despite the fact that this month’s GDP and job numbers outperformed expectations, economists largely anticipated today’s hold as inflation – the key measure used by the BoC to determine its rate path – has trended in the right direction. The Canadian consumer price index, which came in at a promising 5.2% in February, remains nearly double that of the BoC’s 2% target, but is down significantly from last June’s high of 8.1%. That gives the central bank the runway it needs to lay off additional rate hikes for the time being.
In its announcement, the BoC indicated it continues to be data-dependent – not backing down from the possibility of future rate hikes if needed – but the overarching theme was one of no surprises. It’s clear the central bank is largely unphased by the recent numbers, and foresees the economic picture unfolding largely as expected. It now forecasts inflation will fall to around 3% by the middle of this year, before hitting 2% by the end of 2024.
“Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months,” states the Bank’s announcement. “However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize. As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target.”
“This announcement contained detail showing that Canada is moving in the direction that the Bank was hoping and had forecasted, which is why they held rates for a second month in a row. This will cause stable mortgage rates and home values and allow more accurate forecasting for the remainder of the year,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.
“The Bank is confident that they will achieve their mid-year target of inflation dropping below three per cent.”
Continued relief for mortgage borrowers
That rates are remaining unchanged this month is music to variable-rate borrowers’ ears, as the Bank has increased its key rate – which sets the floor for prime-based lending products – a historic eight times between last March and January 2023. That’s brought the benchmark cost of borrowing up by 4.25%, from the pandemic-low of 0.25%.
That’s caused mortgage rates of all types to soar; those with variable-rate mortgages have seen either their monthly payments increase, or considerably less of those payments going toward their principal balance. Fixed mortgage borrowers already locked into a term have been largely sheltered from the volatility, but the bond market has reacted sharply to economic trends, pushing five-year government bond yields up 45 basis points higher than they sat a year ago.
“Variable-rate and HELOC holders will be relieved that this is the Bank’s second rate hold. They might have been hoping for any suggestion of rate cuts this year, which is notably absent,” adds Laird.
Overall, as a result of the BoC’s hiking cycle, the average variable-rate mortgage holder has seen their monthly payment increase by $1,514 per month (totalling $18,168 per year) – a 59% increase. This is based on a homeowner making a 10% down payment on a $748,450* home with a five-year variable rate of 0.90%,** amortized over 25 years.
Fixed rates, meanwhile, won’t be heavily influenced by today’s announcement, says Laird, as this latest rate hold was in line with market expectations.
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A recession is still on the radar
The Bank is also cognizant of the fact that the effects of its latest hiking spree have yet to be fully realized, further fuelling the growing risk of recession. While it acknowledges that the labour market remains tight, with population gains adding to wage growth and consumption, it expects GDP growth to cool in the second half of the year, especially as housing market activity “remains subdued.”
“As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year,” writes the Bank. "Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year.”
This supports recent polling of Canadian business owners, who are becoming increasingly pessimistic about the economy; the first-quarter Business Outlook Survey conducted by the Bank found sentiment had plunged to 35% from 60% compared to the same time last year, as two-thirds anticipate a recession by the end of this year.
The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.
Growing expectations of this impending economic slump have led to analysts calls for a rate cut or two this year, with the market pricing in a potential decrease by September or October.
The US influence
The other factors supporting the Bank’s commitment to status quo are largely south of the border. Recent banking crisis fears, which led to considerable volatility in financial markets, have raised doubts that central banks – including the US Federal Reserve – have room to pursue tighter monetary policy.
While not reflected in today’s announcement, US inflation numbers out this morning will also make it likely that rate hikes will be off the table in both countries for the time being; American CPI rose by 5% year over year in March, a notable drop from the 6% growth recorded in February. That’s the lowest increase since May 2021, and could be the impetus for the Fed to wrap up its own hiking cycle in its upcoming meeting on May 2 and 3, though still-rising core inflation could set the stage for one last quarter-point increase.
As RBC put it in an analysis note, “Still firm underlying price growth means another 25 basis point interest rate hike from the Federal Reserve is very likely in May. But as growth headwinds continue to build, we think that could be the last increase of this hiking cycle.”
The bottom line
It appears Canadian can count on rate stability in the months to come, as today’s announcement further enforces the data is moving in line with the Bank’s expectations. However, as the market remains volatile, rate trends can shift quickly, particularly for those looking to lock in.
“Anyone who needs a fixed rate in the coming months should get pre-approved,” says Laird. This will protect them from any unexpected rate increases, but still give them access to any lower rate available when they apply.”