The Bank of Canada announced today that it is leaving its trend-setting interest rate, called the Overnight Lending Rate, unchanged at 0.25%, where it has remained since March 27, 2020. The central bank has kept this rate, which is in turn used by consumer banks to set their own borrowing prices, at a historical low in efforts to protect the economy during the COVID-19 downturn.
Now, even though rolled-back lockdowns and widespread vaccinations mean economies are opening back up, the BoC has said there’s enough lingering uncertainty to stick to its lower-rate mandate until at least the second half of 2022.
What Does This Mean for Mortgages?
The BoC’s Overnight Lending Rate directly influences the variable cost of borrowing at Canada’s consumer lenders; banks will increase or discount their variable mortgage rates and lines of credit to reflect whatever policy direction the central bank has set.
This means variable mortgage rates have been discounted to historic lows throughout the pandemic – recently hitting a new record low of 0.98% for a five-year term – and will continue to be priced very competitively until the BoC chooses to hike its rate. And, as variable borrowing product rates fluctuate along with the market’s cost of borrowing, current variable mortgage holders won’t see any changes to their payments for the foreseeable future.
Fixed Mortgage Rates Could Rise
However, while the BoC has left its rate untouched, it has been tinkering with its second method of economic stimulation – the act of buying back bonds and other government investment vehicles en masse. Called quantitative easing, or QE for short, this effectively keeps costs low for investors, further encouraging economic stimulation. The BoC has been steadily scaling their QE back since the start of the year, reducing their weekly spend to $2 billion from the original $4 billion set at the start of the pandemic, and this could impact the pricing for fixed mortgage rates.
Unlike with their variable mortgage products, banks take their pricing cues for fixed-rate mortgages from the current state of bond yields; when they’re low (a direct result from QE), the bank passes those savings onto the consumer in the form of lower mortgage rates. When yields rise, as they will in response to reduced QE, lenders will have reason to edge their fixed rates higher.
However, this will only have a direct impact on borrowers signing up for new mortgages or renewing and refinancing, as fixed rates are locked in for the entirety of the mortgage term. As well, the BoC has re-iterated that its QE scale-back will be gradual, and that it is committed to keeping fixed rates low as part of stimulus efforts.
How Will This Impact the Housing Market?
Low mortgage rates have been a contributor to increased home buying demand over the course of the pandemic, and the continued cheap cost of borrowing will remain a source of motivation for those considering a market move. However, there have been other factors in play that have cooled Canada’s housing market from the scorching peak observed in March.
The most recent numbers on the Vancouver and Toronto real estate markets indicate sales have dropped 34% and 29%, respectively, between March and June, though average prices remain historically high near the $1.1-million range. This is due to a combination of factors including buyer fatigue, hitting a price ceiling, a lack of supply constraining deals, and overall summer seasonality. As well, as life begins to resemble “normalcy”, many prospective buyers are taking a break from the urgency of their house hunt to enjoy the benefits of re-opened society.
The Canadian Economy Continues its Strong Recovery
Overall, the BoC is encouraged by the economy’s recovery from COVID – but it notes that the impact has been hugely uneven among various industries, and that new virus variants continue to pose a threat, calling for continued economic stimulus measures.
In its economic analysis, the BoC notes that the economy faltered in the second quarter of the year, but is poised for a strong recovery in the second half of 2021. It forecasts GDP growth will hit 6% – lower than what was initially called for in April, but the long-term picture has been improved to growth of 4.5% in 2022, and 3.25% in 2023.
Inflation is an especially hot-button topic, and is forcing the BoC to buck its usual trend of hiking interest rates when it hits the 2% range – a mix of temporary factors such as rising gas prices and shipping bottlenecks have contributed to a current inflation rate of 3%, which the BoC expects to remain before moderating back to 2% next year. Consumer spending is anticipated to pick up strongly, helping to offset the weaker performance in the housing market.
Given all these factors, the BoC says there’s still plenty of excess in the economy, which will require it to take a low-rate stance for the time being. Borrowers and home buyers can rest easy knowing they’ll have access to cheap rates until at least the second half of next year.
The next BoC Interest Rate Announcement is set for September 8, 2021.