The Bank of Canada (BoC) is ending the year on a cautious note, leaving its trend-setting Overnight Lending interest rate at 1 per cent – however it alluded there will be more rate hikes to come in the new year, should economic growth unfold as expected.
“While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation,” the BoC stated.
The Path to “Normalization”
While inflation, consumer spending, and jobs growth all had a strong showing in the final quarter of the year, The BoC must take a ginger approach to setting the cost of borrowing, which it started to “normalize” with rate increases in July and September.
The BoC’s “neutral” goal for its interest rate is 3 per cent, but taking it there too quickly could shock consumers and especially mortgage borrowers, who are grappling with a combination of higher interest rates, tougher loan qualification standards, and new policies designed to calm housing market prices. Adding another rate increase to the mix now could overly cool the market, as well as threaten households’ abilities to pay off their debt levels – officially the heaviest in the world, according to the Group of Seven.
There are also uncertainties regarding global economies and the future of trade – while the U.S., Canada’s biggest trading partner, had a strong quarter, that’s expected to moderate in the medium term, the BoC forecasts. It’s also unclear how negotiations will play out for the North American Free Trade Act, which could throw Canada’s economy into flux.
“Based on the outlook for inflation and the evolution of the risks and uncertainties identified in October’s MPR, Governing Council judges that the current stance of monetary policy remains appropriate,” states the BoC.
Analysts Call for Multiple Hikes in New Year
While it was widely expected the BoC would keep rates stable in this announcement – only four of the 26 economists polled by Bloomberg anticipated a hike – there are various stances on when rates will eventually rise.
An independent economic analysis from the C.D. Howe Institute’s Monetary Policy Council says the rate should stay at status quo for the first half of 2018, with a quarter-per-cent increase in May, rising to an eventual 1.50 per cent by the end of the year. However, swap investors are pricing in a more aggressive trajectory, with the first hike of the year as early as March.
What Does This Mean for Your Mortgage Rate?
Borrowers are entitled to a sense of relief, as the Bank’s inaction not only means variable rates won’t rise in the short term, but the Bank of Canada qualification rate shouldn’t rise any higher than its current 4.99 per cent. This rate, which is gleaned from the average of the Big Five Banks’ five-year fixed posted mortgage rates, will be used to stress test borrowers as of January 1st. While fixed mortgage rates are predominantly influenced by Canadian government bond yields, investor activity is inevitably impacted by the BoC’s Overnight Lending Rate; a hike could in turn lead to a bond sell off, which would push yields, and fixed rates, higher.
However, borrowers should buckle up as the new year approaches, as an anticipated 0.50 per cent could be tacked onto mortgage costs before the year is through.
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