May 30, 2018

Bank of Canada Holds May Rate – but Hike is on Horizon

It’s not a question of if, but when. The Bank of Canada held its trend-setting interest rate at 1.25 per cent today, where it has sat since January, but another hike is widely expected as soon as July.

With all economic factors looking up, the BoC strongly hinted it’s only a matter of time before it will need to tighten its monetary policy, despite lingering uncertainly around emerging markets and the status of NAFTA. A strengthening U.S economy, combined with higher-than-expected oil prices in April, continue to push domestic inflation close to its 2-per-cent target, a main impetus for rate hikes.

“Overall developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target,” the BoC stated in its May announcement.

Other economic factors, such as exports and business investment, have also performed well and in line with the forecast the BoC released in its April Monetary Policy Report.

BoC Forecasts Stronger Housing Market

While the housing market – a main economic contributor – remained soft in the second quarter of 2018 due to a combination of rising interest rates and new mortgage qualification requirements, the BoC predicts the downturn will be short-lived.

“Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018,” it states.

These positive developments have economists in consensus that the BoC will increase its rate by another quarter of a per cent in its July 11 announcement, with another hike to come before the year is through.

What Does This Mean for Mortgage Borrowers?

The BoC’s Overnight Rate is used to set the Prime rate for consumer lenders, such as the Big Six banks, which in turn influences the cost of variable borrowing in Canada. This means those who have variable loans – including variable-rate mortgages and lines of credit – are directly impacted when the BoC changes its rate.

The outcome of today’s announcements means there will be no short-term change to monthly payments for variable mortgage holders – but the writing is on the wall. With strong expectation for at least two more hikes in the medium term, it’s important for borrowers to ensure they can absorb any upward movement to their monthly debt costs.

While fixed-rate mortgage borrowers will not be directly impacted by changes to the Overnight Lending Rate, any move made by the BoC eventually filters throughout the economy and impacts the overall cost of borrowing. For example, a rate hike next month will in turn impact the bond market and put upward pressure on yields, which in turn influence lenders to increase their fixed mortgage rates. This will have an impact on those coming up to renewal on their fixed-mortgage terms, and potentially for those renewing in the long-term, should a higher interest rate environment persist.

Related Read: Why Are Fixed and Variable Mortgage Rates on the Rise?