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Soft Q4 GDP firms up chance of BoC rate hold

Since last March, the Bank of Canada has had the unenviable task of tackling soaring inflation, via a series of interest rate hikes – no easy feat as the economy has persistently run hot, despite growing recession concerns.

But it looks as though higher interest rates are finally making themselves felt, as Statistics Canada just reported flat-as-a-pancake GDP growth over the last three months of 2022.

The data shows 0.0% growth between October and December – including a 0.1% contraction in the last month of the year – despite higher household and government spending. It’s the first such stagnancy following five consecutive quarterly increases, and is proof positive the economy is feeling the brunt of the BoC’s infamous hiking cycle.

Overall, the numbers came in lower than Bay Street’s forecasted 1.5%, and the BoC’s own call for 1.3%. For 2022 as a whole, GDP grew 3.4%, the second annual increase recorded after shrinking in 2020 due to the pandemic.

GDP report shows higher rates impacting real estate, mortgage demand

According to StatCan, the slowdown can largely be attributed to scant inventory growth and business investment, as well as drooping activity in the housing market, which fell 2.3% in Q4. This included new construction (-1.4%), renovations (-2.6%) and ownership transfer costs (-4.0%) – all signs homebuyers and owners are grappling with higher mortgage rates, says the national statistics office.

“This coincided with higher borrowing costs. residential investment contracted again in the fourth quarter, falling 8.8% for the third consecutive quarterly decline,” states the GDP report, noting that the economy had to absorb two interest rate hikes in Q4.

“The subsequent rise in mortgage interest rates put a damper on housing demand, as the ownership transfer costs decreased nationally by 26.3%, with Alberta recording the only increase (+0.1%) among provinces. Overall, housing investment declined 11.1% in 2022.” 

Meanwhile, mortgage debt boomed by $20.3B in the fourth quarter, adding to the $118.5B Canadians racked up in the first nine months of 2022.

Canadians can count on “conditional” rate hold in March

While signs of a slowing economy are rarely cheered by markets, this latest crop of data could spell rate relief for mortgage borrowers in the coming months. 

The Bank of Canada had stoked optimism in its January rate announcement, stating it would take a “conditional” rate hold stance as long as inflation and other economic factors trend downward.

While doubts were sowed in February due to stronger-than-expected labour numbers and hotter-than-hoped for US inflation, Canada’s own CPI report showed consumption is indeed slowing down as per the BoC’s wishes. This week’s GDP report further seals this rate hold scenario.

“[This week’s] mostly soft report won't be a disappointment to policymakers, as the Bank of Canada is openly attempting to take some steam out of the economy. And zero-point-zero growth is about as little steam as one could ask for, without pushing things into an outright downturn,” writes Doug Porter, Chief Economist and Managing Director of Economics at BMO. 

Adds James Laird, Co-CEO of and President of CanWise mortgage lender, “The Bank will almost certainly hold the key overnight rate at 4.50 per cent on March 8th. Next week’s announcement should provide insights into how committed the Bank is to leaving rates unchanged going forward. This is the Bank’s chance to comment on all of the economic and inflation data that they have received since their last announcement in January.”

That’s music to the ears of those currently holding variable-rate mortgages, as a rate hold means no change to their rate or payments in the short term.

Many of those who’ve taken out variable mortgages since 2020 have been tightly squeezed by the BoC’s rate hikes, which caused variable mortgage rates to balloon 623% in 2022 alone.

As a result, many variable mortgage borrowers who have variable payments saw those payments soar beyond their affordability, while many with fixed payments approached or passed their trigger rate or point, meaning they are now only paying the interest, or even owe more on their mortgage than the equity they hold in the home.

Fixed mortgage-rate holders have also experienced their fair share of price pain. While those who locked into a fixed rate prior to last year’s hiking cycle may have avoided the worst of the market’s volatility, a surging bond market means those shopping for a new fixed-rate mortgage, or are looking to renew their existing, are facing pricing 194% higher than the same time last year.

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And markets could be in for more turbulence next week, as yields will respond to whatever direction the BoC hints at in its announcement commentary on March 8.

“Fixed-rate mortgages will change based on the Bank's forward commentary. If the Bank alludes to the need to hike rates further, we will see bond yields rise and fixed rates will follow,” says Laird.

“Anyone shopping for a home should get a pre-approval to hold today's rates for up to 120 days. This will allow them to have today's rates secured, and if rates drop further they will still be eligible for the lower rates.”

The bottom line  

While the economy appears to be chilling as the central bank intends, economists point to the GDP report’s “mixed bag” as a sign the BoC will want to see more data before it provides a hard direction on what’s to come next. 

The report reveals that, despite rising interest rates, overall household spending still rose 0.5% in Q4, and up 4.8% in 2022. As well, the flash estimate from StatCan calls for 0.3% growth in January.

However, whether this indicates the economic slowdown may be short lived remains to be seen.

As BMO’s Porter put it, “Growth will need to hold below potential (about 2%) to dampen excess demand and reduce inflation pressures. Today's result simply reaffirms that the BoC will be on hold at next week's decision, and if growth remains below potential—as we expect—they will likely stay on the sidelines. The key for the Bank will be whether the bounce in January GDP was the start of a trend, or a one-off weather-related fluke; we suspect it's mostly the latter.”

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