Despite inflation reaching a 30-year high, the Bank of Canada opted today to leave its trend-setting Overnight Lending Rate untouched at 0.25%, where it has remained since March 2020 in what they’re calling the “final step of exiting from emergency policies.”
In their press conference today, Tiff Macklem, Governor of the Bank of Canada expanded on the decision by saying, “Today marks the final step in exiting from emergency policies. We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council now judges this condition has been met. As such, we are removing our commitment to hold our policy rate at its floor of 0.25%.”
CPI inflation reaching 5% in Canada had many financial experts forecasting a rate increase today, earlier than the mid-2022 increases the Bank of Canada had been forecasting in their last few announcements.
The Central Bank stands by its decision to hold rates by strongly attributing this above-target inflation rate to global supply chain disruptions, weather-related increases in agricultural prices, and high energy prices – all factors that the Bank believes are temporary. While they expect these factors to continue for the first half of the year, they anticipate their effects to decrease in the later months of the year, bringing overall CPI inflation back to 3%, with inflation easing back to its 2% target in 2023 and 2024.
In light of the Bank’s decision to hold today, and strong messaging that signals the end of their emergency policies, many experts anticipate their next announcement on March 2nd will include the first post-pandemic rate hike.
January’s Monetary Policy Report Predicts A Strong 2022 Housing Market
In today’s Monetary Policy Report, the Bank of Canada cites low borrowing rates and high disposable incomes are contributing to elevated levels of housing activity early in 2022. Not to mention the increase in demand they anticipate coming into play this year as immigration (and population growth) resumes.
This being said, they also recognize that as the economy rounds the corner of COVID-19 recovery, many of the factors that induced the extremely high pandemic-era housing demand will fade – like historically low borrowing costs, and heightened accumulated savings as Canadians skipped out on travel, entertainment, and the cost of commuting throughout lockdown measures.
In step with their predictions that the economy is now entering the pandemic recovery phase, the Bank of Canada expects that housing market activity will remain elevated but ease from the red-hot levels we’ve seen over the last two years. This is consistent with predictions made from other national bodies, like the Canadian Real Estate Association, which anticipates the national average home price to grow 7.6% in 2022 compared to the 26.6% growth rate seen last year.
In terms of housing supply, the Bank of Canada anticipates that the supply chain disruptions that have been greatly impacting residential construction will ease over the course of 2022 – meaning it should be easier to build new housing supply this year than it has been previously in the pandemic. This anticipated growth in supply combined with easing demand was factored into their overall predictions for housing activity in 2022.
What Should Today’s Buyers Know About This Year’s Rate Increases?
The Central Bank has been clear that rate increases in 2022 are a matter of if, not when. Buyers should take note that in today’s release the Bank announced an end to their “exceptional forward guidance” and expect that interest rates will need to increase to achieve their 2% inflation target. This is a strong signal that change is on its way.
For buyers looking to get into the market early this year, locking in a mortgage rate by getting a mortgage pre-approval (and subsequent rate hold) is a strategy that can be used to secure the best rate possible. Talking to your mortgage professional about your next steps is a great place to start.
What Does Today’s Announcement Mean For My Mortgage?
The Overnight Lending Rate is used by consumer lenders when setting their Prime Rate, which influences the cost of their variable lending products. For borrowers with a variable-rate mortgage, you won’t see any changes to your monthly payments or the amount of payment going towards your principal loan as a result of today’s announcement.
However, variable-rate borrows should keep in mind that rate increases are on the horizon and consider their budgets accordingly. While we don’t yet know exactly when the next rate increase will take place, or how many increases we will see over the course of the year, the Bank of Canada has been persistent in its messaging that they are planning to use rate increases to control inflation this year.
For those with a fixed-rate mortgage, you’ll be largely unaffected by today’s announcements since your monthly payments are locked for the duration of your mortgage term. However, those looking to refinance or renew later this year will likely be faced with higher rates than we’re seeing today.
The Bank of Canada’s Next Announcement Will Take Place on March 2nd, 2022.
